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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED FEBRUARY 1, 1998
COMMISSION FILE NUMBER: 0-17017
DELL COMPUTER CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE 74-2487834
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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ONE DELL WAY, ROUND ROCK, TEXAS 78682-2244
(Address, including Zip Code, of registrant's principal executive offices)
(512) 338-4400
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.01 per share
Preferred Stock Purchase Rights
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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AGGREGATE MARKET VALUE OF COMMON STOCK HELD BY
NON-AFFILIATES OF THE REGISTRANT AS OF MARCH 31, 1998..... $36,352,865,736
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF MARCH 31,
1998...................................................... 640,316,904
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PART I
ITEM 1 - BUSINESS
GENERAL
Dell Computer Corporation (the "Company") designs, develops, manufactures,
markets, services and supports a wide range of computer systems, including
desktops, notebooks, workstations and network servers, and also markets
software, peripherals and service and support programs. With revenue of $12.3
billion for fiscal 1998 (which ended on February 1, 1998), the Company is the
world's leading direct computer systems company and one of the top three
computer systems companies in the world.
The Company is a Delaware corporation that was incorporated in October 1987,
succeeding to the business of a predecessor Texas corporation that was
originally incorporated in May 1984. Based in Round Rock, Texas, the Company
conducts operations worldwide through wholly-owned subsidiaries. See "Item
1 -- Business -- Geographic Areas of Operations" below. Unless otherwise
specified, references herein to the "Company" are references to the Company and
its consolidated subsidiaries. The Company operates in one principal industry
segment.
The Company's common stock, par value $.01 per share, is listed on The Nasdaq
National Market under the symbol "DELL." See "Item 5 -- Market for Registrant's
Common Equity and Related Stockholder Matters -- Market Information" below.
BUSINESS STRATEGY
The Company's business strategy, centered around its direct business model, is
customer-focused and aims to deliver the best customer experience through
direct, comprehensive customer relationships, cooperative research and
development with technology partners, custom-built computer systems and service
and support programs tailored to customer needs. The Company believes that this
approach provides it with several competitive advantages. The approach
eliminates the need to support an extensive network of wholesale and retail
dealers, thereby avoiding typical dealer mark-ups; avoids the higher inventory
costs associated with the wholesale/retail channel and the competition for
retail shelf space; and reduces the obsolescence risk associated with products
in a rapidly changing technological market. In addition, direct customer contact
allows the Company to maintain, monitor and update a database of information
about customers and their current and future products and service needs, which
can be used to shape future product offerings and post-sale service and support
programs. This direct approach, combined with the Company's efficient
procurement, manufacturing and distribution processes, allows the Company to
bring relevant technology to its customers faster and more competitively priced
than many of its competitors.
Comprehensive Customer Relationships -- The Company develops and utilizes direct
customer relationships to understand end-users' needs and to deliver high
quality computer products and services tailored to meet those needs. The type of
relationship depends on the type of customer. For large corporate and
institutional customers, the relationship may begin prior to sale, when the
Company works with the customer to plan a strategy to meet that customer's
current and future technology needs. The direct relationship continues after the
sale, as dedicated account teams consisting of sales, customer service and
technical personnel continue to support the customer's technology objectives.
The Company also establishes direct relationships with medium and small
businesses and home users, either through account representatives, through
telephone sales representatives or through Internet contact. All of these direct
customer relationships provide the Company with a flow of information about its
customers' plans and requirements and enable it to weigh their needs against
emerging technologies.
Cooperative Research and Development -- The Company also develops cooperative,
meaningful relationships with the world's most advanced technology companies.
Working with these compa-
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nies, the Company's engineers manage quality, integrate technologies and design
and manage system architecture. This cooperative approach allows the Company to
determine the best method and timing for delivering new technologies to the
market. The Company's goal is to deliver relevant technology to its customers at
the right time.
Custom-Built Computers -- The Company was founded on the principle that
delivering computers custom-built to specific customer orders is the best
business model for providing solutions that are truly relevant to end-user
needs. This build-to-order, flexible manufacturing process enables the Company
to achieve faster inventory turnover and reduced inventory levels and allows the
Company to rapidly incorporate new technologies and components into its product
offerings.
Custom-Tailored Service and Support Programs -- In the same way that the
Company's computer products are built-to-order, service and support programs are
designed to fit specific customer requirements. The Company offers a broad range
of service and support programs through its own technical personnel and its
direct management of specialized service suppliers. These services range from
telephone and Internet support to on-site customer-dedicated systems engineers.
While the Company believes that its business strategy provides it with
competitive advantages, there are many factors that may affect the Company's
business and the success of its operations. For a discussion of these factors,
see "Item 1 -- Business -- Factors Affecting the Company's Business and
Prospects" below.
GEOGRAPHIC AREAS OF OPERATIONS
The Company's products are currently sold in more than 170 countries worldwide.
The Company has organized its worldwide operations into geographic regions to
support its customers in each area through regional business units. The Americas
region, which is based in Round Rock, Texas, covers the United States, Canada
and Latin America. The European region, which is based in Bracknell, England,
covers the European countries and also some countries in the Middle East and
Africa. The Asia-Pacific/Japan region covers the Far East, including Japan,
Australia and New Zealand, and is based in Hong Kong (for areas other than
Japan) and Kawasaki, Japan (for Japan).
The Company's corporate headquarters are located in Round Rock, Texas, and its
manufacturing facilities are located in Austin, Texas; Limerick, Ireland; and
Penang, Malaysia. See "Item 2 -- Properties" below.
For financial information about the results of the Company's operations by
geographic region for each of the last three fiscal years, see Note 11 of Notes
to Consolidated Financial Statements included in "Item 8 -- Financial Statements
and Supplementary Data" below.
During fiscal 1998, the Company continued to strengthen its presence in the
Asia-Pacific area, where it now has direct-to-the-customer operations in eleven
countries. In addition, since the end of fiscal 1998, the Company has announced
that it will establish a customer center in China to produce, sell and provide
service and technical support for the Company's full range of computer systems
in that market. The Company expects to begin operations from the China Customer
Center later this year. The Company intends to continue to expand its
international activities by increasing its market presence in existing markets
and by entering new markets. International activities are subject to special
risks. See "Item 1 -- Business -- Factors Affecting the Company's Business and
Prospects" below.
PRODUCT PORTFOLIO
The Company offers a wide range of computer systems, including desktops,
notebooks, workstations and network servers, as well as software, peripherals
and service and support programs.
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Desktop Computer Systems -- The Company's OptiPlex(R) line of desktop computer
systems is the Company's mainstream offering for corporate and institutional
customers who require highly reliable systems optimized for use in networked
environments. All systems within the OptiPlex line are "Managed PCs," enabling
remote manageability and control using industry-standard systems management
tools. Some OptiPlex systems are designed for optimal performance with 32-bit
operating systems, and some are available as Net PCs. All OptiPlex systems
utilize the Company's no-tool OptiFrame(TM) chassis, easing serviceability and
upgradability. The OptiFrame chassis is built entirely from recyclable
materials.
The Dell Dimension(R) line of desktop computer systems is designed for small
businesses, workgroups and individuals, who generally demand fast performance
and the latest technology without the need for remote manageability. Some
systems within the Dimension line contain the latest, state-of-the-art
technology and are targeted at technologically sophisticated users, while others
are designed for more value-oriented users.
Notebook Computers -- The Company offers two lines of notebook computer systems,
each designed for targeted customer needs. The Latitude(R) line is targeted at
business customers who require highly reliable and durable systems with maximum
connectivity for use in networked environments. The Inspiron(TM) line, which was
introduced in September 1997, is targeted at technologically sophisticated users
who require the latest technology and high-end multimedia performance.
Workstations -- During fiscal 1998, the Company entered the workstation market
when it began offering the Dell Workstation 400. These Windows NT(R)-based
systems incorporate highly advanced technology and are designed specifically to
run sophisticated, intensive professional applications, such as computer-aided
design, financial service and software development programs.
Network Servers -- The PowerEdge(R) line of network servers consists of systems
that can operate as file servers, database servers, applications servers and
communications/groupware servers in a networked computing environment. PowerEdge
systems can be configured as desired for use in a range of networked
environments, from single workgroups to entire enterprises. The Company also
offers rack-mountable chassis for its network servers and a Scalable Disk System
for increasing network storage capacity.
Software and Accessories -- In addition to its own branded products, the Company
offers a wide range of software, peripherals and other accessories through its
DellWare(R) program. Through its DellPlus software integration program, the
Company can factory-install a customer's proprietary applications or hard-disk
images at the time of system manufacture and deliver other customer-specific
solutions. Through the ReadyWare(R) program, the Company can factory-install
off-the-shelf software applications and interface cards in any computer system
the Company sells.
Service and Support -- The Company enhances its product offerings with a number
of specialized services, including custom hardware and software integration,
leasing and asset management and network installation and support. The Company
offers next-business-day delivery, as well as an extended training and support
program on many of its software offerings. For additional discussion of the
Company's service and support programs, see "Item 1 -- Business -- Service and
Support" below.
MARKETING AND SALES
The Company's customers range from large corporations, government agencies and
medical and educational institutions to small businesses and individuals. The
Company segments its sales and marketing approaches to meet the needs of various
types of customers. No single customer accounted for more than 10% of the
Company's consolidated net sales during any of the last three fiscal years.
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Relationship Business -- The Company has a broad range of business based on
continuing relationships with Fortune 500(R) companies, governmental, medical
and educational institutions and small-to-medium businesses. The Company
maintains a field sales force calling on business and institutional customers
and prospects. The Company develops direct sales marketing programs and services
specifically geared to these relationship customers. For large customers,
dedicated account teams, consisting of sales, customer service and technical
support representatives, form long-term customer relationships to provide each
customer with a single source of assistance on various issues, including
technology needs assessment; system configuration; order placement; lifecycle
cost management; technology transition planning; installation assistance and
project management; and detailed product, service and financial reporting. To
support these teams, the Company has account executives in many major cities
around the world. For customers with in-house maintenance organizations, the
Company offers a variety of programs, including specialized computer training
programs, a repair parts assistance program and other customized programs to
provide access to the Company's technical support team. Customized product
delivery and service programs are available on a worldwide basis. See "Item
1 -- Business -- Service and Support" below.
For multinational corporate customers, the Company offers several programs
designed to provide global capability, support and coordination. Through these
programs, the Company can provide single points of contact and accountability
with global account specialists, special global pricing, consistent service and
support programs across global regions and access to central purchasing
facilities.
The Company also has specific sales and marketing programs targeted at federal,
state and local governmental agencies. The Company maintains account teams
(consisting of sales representatives, K12 and higher education sales
representatives, health care sales representatives and technical support
representatives) dedicated to specific governmental markets. The Company holds a
U.S. General Services Administration Schedule contract, through which it sells
to U.S. federal governmental agencies.
Transactional Business -- The Company also has a significant base of business
among small-to-medium businesses and home users. The Company maintains a sales
force that markets its products and services to these customers by advertising
in trade and general business publications and by mailing a broad range of
direct marketing publications, such as promotional pieces, catalogs and customer
newsletters. The Company believes these customers value its ability to provide
reliable, custom configured computer systems at competitive prices,
knowledgeable sales assistance, post-sale support and on-site service offerings.
Internet Business -- An increasing portion of the Company's business is being
conducted via the Internet through the Company's World Wide Web site at
www.dell.com. Through the web site, customers and potential customers can access
a wide range of information about the Company's product offerings, can configure
and purchase systems on-line and can access volumes of support and technical
information. By the end of fiscal 1998, the Company was receiving in excess of
800,000 visits per week to www.dell.com, where it maintains nearly 42
country-specific sites, and Company revenue generated through the Internet
exceeded $4 million a day.
The Company also utilizes the Internet to enhance the direct relationships with
its customers. The Company designs and implements custom Internet sites, called
Premier Pages(SM), for various large customers, allowing these customers to
simplify and accelerate procurement and support processes. Through these custom
sites, the Company is able to provide the customer with on-line configuration,
pricing and purchasing capability; on-line detailed order, purchasing and
inventory reports; and critical account team information.
Leasing and Asset Management Services -- During fiscal 1998, the Company formed
Dell Financial Services L.P. ("DFS") as a joint venture with Newcourt Credit
Group Inc., a financial services company headquartered in Toronto, Canada. DFS
offers leasing and other financial services
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(including asset management and recovery, technology planning and project
management) that are directly integrated with the Company's sales and
manufacturing capabilities.
SERVICE AND SUPPORT
The Company offers a variety of service and support programs in all of its
geographic markets. The following is a brief description of the service and
support programs offered exclusively or primarily to the Company's U.S.
customers. A full line of warranty, service and support options are available in
the Company's international markets, but these options can vary significantly
based on the local market and customer requirements.
Standard Programs -- Most of the Company's systems include a standard one-year,
next-business-day, on-site service contract. In addition, basic warranty
coverage for the Company's systems includes either a three-year or one-year
limited warranty (depending on the system). The three-year warranties include
one year of parts and labor coverage and two additional years of parts-only
coverage, while the one-year warranties include a year of parts and labor
coverage. The Company also provides a 30-day "Total Satisfaction" money back
guarantee for any end-user customer buying a system directly from the Company.
The Company provides all of its customers with access to a toll-free hardware
support line that is accessible 24 hours a day, 7 days a week. The technical
specialists staffing this line maintain close contact with the Company's
marketing, manufacturing and product design groups and have on-line access to
each customer's original system configuration and service history. The Company
also provides automated and on-line technical support through a variety of
avenues, including the Internet (via www.dell.com, e-mail or on-line
subscription services), its TechConnect service (an interactive bulletin board
service), its AutoTech system (an interactive voice response unit) and its
TechFax system (a fax-back service).
Many of the Company's systems include software that helps customers diagnose and
communicate system problems. Several systems also include a built-in diagnostics
program that can provide on-line information about system malfunctions.
Additional Options -- Recognizing that customer service and support requirements
vary, the Company offers customers the opportunity to customize their service
and support programs by selecting additional levels of service and support to
satisfy their individual needs. Through the SelectCare(R) program, which is
available for all desktop and notebook systems, the Company offers a broad range
of service and support options beyond the standard programs, including an
extension of the standard one-year service contract to include up to four
additional years of next-business-day, on-site service.
The Company's BusinessCare(SM) and BusinessCare Plus programs are standard
warranty upgrades available to PowerEdge server customers. The BusinessCare
program includes one year of next-business-day parts and labor on-site service,
two additional years of parts delivery service and five full assistance calls to
the Company's DirectLine(SM) network operating system support technicians. The
BusinessCare Plus program includes three years of four-hour, same-day service,
as well as five full assistance calls to the DirectLine network.
The Company's Premier Access(SM) program is a service and support program
specifically designed for IS professionals who have technical expertise in
diagnosing and servicing computer systems. Customers can choose their level of
service under the program, including rapid service and parts dispatches, direct
access to advanced level technical support, specialized on-line support,
reimbursement for certain labor costs and parts management assistance.
Through the DellPlus program, the Company offers specialized services designed
to satisfy customers' unique hardware and software integration requirements.
With this program, a customer's particular integration requirements (whether
hardware related, such as specialized network cards, video and graphic boards,
modems, tape drives or hard drives; or software related, such as
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customer proprietary software applications or drivers) can be satisfied at the
time the customer's systems are manufactured. This is in addition to the
Company's ReadyWare program, which is a collection of popular software
applications and interface cards that can be factory-installed.
The Company also offers a variety of on-site installation services that can be
customized to meet the needs of each specific customer. These services include
basic installation and orientation, system connectivity and functional testing,
external peripheral installation, internal device installation and file server
and advanced system installation.
Many of the Company's service and support programs, particularly software
support and on-site service programs, are provided through independent
third-party contractors.
MANUFACTURING
The Company operates manufacturing facilities in Austin, Texas; Limerick,
Ireland; and Penang, Malaysia. During fiscal 1998, the Company opened an
additional manufacturing facility in Austin to produce OptiPlex desktop systems
for the Americas region. Since the end of fiscal 1998, the Company has announced
plans to acquire an additional manufacturing facility in Limerick, Ireland and
to construct an additional manufacturing facility in Austin, Texas and a
manufacturing facility in Xiamen, China.
The Company's manufacturing process consists of assembly, functional testing and
quality control of the Company's computer systems. Testing and quality control
processes are also applied to components, parts and subassemblies obtained from
suppliers. The Company's build-to-order manufacturing process is designed to
allow the Company to quickly produce customized computer systems and to achieve
rapid inventory turnover and reduced inventory levels, which lessens the
Company's exposure to the risk of declining inventory values. This flexible
manufacturing process also allows the Company to incorporate new technologies or
components into its product offerings quickly.
The Company contracts with various suppliers to manufacture unconfigured base
notebook computers and then custom configures these systems for shipment to
customers.
Quality control is maintained through the testing of components, parts and
subassemblies at various stages in the manufacturing process. Quality control
also includes a burn-in period for completed units after assembly, on-going
production reliability audits, failure tracking for early identification of
production and component problems and information from the Company's customers
obtained through its direct relationships and service and support programs. The
Company conducts a voluntary vendor certification program, under which qualified
vendors commit to meet defined quality specifications. All of the Company's
manufacturing facilities have been certified as meeting ISO 9002 quality
standards.
PRODUCT DEVELOPMENT
The Company's product development efforts are focused on designing and
developing competitively priced computer systems that adhere to industry
standards and incorporate the technologies and features that the Company
believes are the most desired by its customers. To accomplish this objective,
the Company must evaluate, obtain and incorporate new hardware, software,
storage, communications and peripherals technologies that are primarily
developed by others. The Company's product development team includes
programmers, technical project managers and engineers experienced in system
architecture, logic board design, sub-system development, mechanical
engineering, manufacturing processing and operating systems. This
cross-functional approach to product design has enabled the Company to develop
systems with improved functionality, manufacturability, reliability,
serviceability and performance, while keeping costs competitive. The Company
takes steps to ensure that new products are compatible with industry standards
and that they meet cost objectives based on competitive pricing targets.
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The Company bases its product development efforts on cooperative, meaningful
relationships with the world's most advanced technology companies. These working
partnerships allow the Company to use its direct marketing model and
build-to-order manufacturing process to deliver, on a timely and cost-effective
basis, those emerging technologies that are most relevant to its customers.
During fiscal 1998, the Company incurred $204 million in research, development
and engineering expenses, compared with $126 million for fiscal 1997 and $95
million for fiscal 1996. The amount the Company spends on research, development
and engineering activities, which the Company believes to be important to its
continued success and growth, is determined as part of the annual budget process
and is based on cost-benefit analyses and revenue forecasts. The Company
prioritizes activities to focus on projects that it believes will have the
greatest market acceptance and achieve the highest return on the Company's
investment.
PATENTS, TRADEMARKS AND LICENSES
The Company holds 317 U.S. patents and 7 foreign patents. At March 1, 1998, the
Company had 307 U.S. patent applications pending and 42 foreign applications
pending in several European and Asian countries. The Company's U.S. patents
expire in years 2005 through 2015. The inventions claimed in those patents and
patent applications cover aspects of the Company's current and possible future
computer system products and related technologies. The Company is developing a
portfolio of patents that it anticipates will be of value in negotiating
intellectual property rights with others in the industry.
The Company has obtained U.S. federal trademark registration for its DELL word
mark and its Dell logo mark. The Company owns registrations for 22 of its other
marks in the United States. As of March 1, 1998, the Company had pending
applications for registration of nine other trademarks. The DELL word mark, Dell
logo and other trademark and service mark registrations in the United States may
be renewed as long as the mark continues to be used in interstate commerce. The
Company believes that establishment of the DELL mark and logo in the United
States is material to the Company's operations. The Company has also applied for
or obtained registration of the DELL mark and several other marks in
approximately 190 other countries or jurisdictions where the Company conducts or
anticipates expanding its international business. The Company has also taken
steps to reserve corporate names and to form non-operating subsidiaries in
certain foreign countries where the Company anticipates expanding its
international business. The Company is precluded from obtaining a registration
for trademarks consisting of or incorporating the term "Dell" in certain foreign
countries, although the Company does not believe that its inability to register
"Dell" as a trademark in such countries will have a material adverse effect on
its business.
The Company has entered into a variety of licensing and cross-licensing
agreements pursuant to which the Company licenses various patented hardware
technology. In addition, the Company has entered into non-exclusive licensing
agreements with Microsoft Corporation for various operating system and
application software. The Company has also entered into various other software
licensing agreements with other companies.
From time to time, other companies and individuals assert exclusive patent,
copyright, trademark or other intellectual property rights to technologies or
marks that are important to the computer industry or the Company's business. The
Company evaluates each claim relating to its products and, if appropriate, seeks
a license to use the protected technology. The licensing agreements generally do
not require the counterparty to assist the Company in duplicating its patented
technology nor do these agreements protect the Company from trade secret,
copyright or other violations by the Company or its suppliers in developing or
selling these products.
INFRASTRUCTURE
Management Information Systems -- The Company's management information systems
enable the Company to track each unit sold from the initial sales contacts,
through the manufacturing process
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to post-sale service and support. The system assists the Company in tracking key
information about many of its customers. The Company is able to target marketing
activities specifically to particular types of customers using its database to
assess purchasing trends, advertising effectiveness and customer and product
groupings. This database, unique to the Company's direct model, allows the
Company to gauge customer satisfaction issues and also provides the opportunity
to test new propositions in the marketplace prior to product or service
introductions. The Company continually analyzes updates and enhancements of its
management information systems to more fully integrate them on an
enterprise-wide basis, to reduce redundancy and to incorporate enhanced
functionality.
Employees -- At February 1, 1998, the Company had approximately 16,000
employees. Approximately 11,000 of those employees were located in the United
States, and approximately 5,000 were located in other countries. The Company has
never experienced a work stoppage due to labor difficulties and believes that
its employee relations are good.
GOVERNMENT REGULATION
In the United States, the Federal Communications Commission (the "FCC")
regulates the radio frequency emissions of computing equipment. The FCC has
established two standards for computer products, Class A and Class B. Only Class
B products may be sold for use in a residential environment. Both Class A and
Class B products may be sold for use in a commercial environment. All of the
Company's current desktop, notebook, workstation and network server systems are
sold under the more restrictive Class B certification. The Company periodically
tests its products to ensure that the products satisfy applicable FCC
regulations.
The Company's business also is subject to regulation by various other federal
and state governmental agencies. Such regulation includes the anti-trust
regulatory activities of the U.S. Federal Trade Commission and Department of
Justice, the import/export regulatory activities of the U.S. Department of
Commerce and the product safety regulatory activities of the U.S. Consumer
Products Safety Commission.
The Company also is required to obtain regulatory approvals in other countries
prior to the sale or shipment of products. In certain jurisdictions, such
requirements are more stringent than in the United States. Many developing
nations are just beginning to establish safety, environmental and other
regulatory requirements, which may vary greatly from U.S. requirements.
BACKLOG
At the end of fiscal 1998, backlog was $215 million, compared with backlog of
$222 million at the end of fiscal 1997. The Company does not believe that
backlog is a meaningful indicator of sales that can be expected for any period,
and there can be no assurance that the backlog at any point in time will
translate into sales in any subsequent period, particularly in light of the
Company's policy of allowing customers to cancel or reschedule orders without
penalty prior to commencement of manufacturing.
FACTORS AFFECTING THE COMPANY'S BUSINESS AND PROSPECTS
There are many factors that affect the Company's business and the results of its
operations, some of which are beyond the control of the Company. The following
is a description of some of the important factors that may cause the actual
results of the Company's operations in future periods to differ materially from
those currently expected or desired.
- - General economic and industry conditions -- Any general economic, business or
industry conditions that cause customers or potential customers to reduce or
delay their investments in computer systems could have a negative effect on
the Company's strength and profitability. For example, a softening of demand
for computer systems may result in decreased revenues (or at least declining
revenue growth rates) for computer manufacturers in general and the Company in
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particular and may result in pricing pressures for products that the Company
sells, which could have a negative effect on the Company's revenues and
profitability.
- - Competition -- The computer industry is highly competitive. Some of the
Company's competitors have stronger brand-recognition, greater financial,
marketing, manufacturing and technological resources, broader product lines
and larger installed customer bases than does the Company. The intense
competition inherent in the industry could result in loss of customers or
pricing pressures, which would negatively affect the Company's results of
operations.
- - International activities -- The Company's future growth rates and success are
partly dependent on continued growth and success in international markets. As
is the case with most international operations, the success and profitability
of the Company's international operations are subject to numerous risks and
uncertainties, including local economic and labor conditions, political
instability, tax laws (including U.S. taxes on foreign operations) and foreign
currency exchange rates.
- - Product, customer and geographic mix -- The profit margins realized by the
Company vary somewhat among its products, its customer segments and its
geographic markets. Consequently, the overall profitability of the Company's
operations in any given period is partially dependent on the product, customer
and geographic mix reflected in that period's net sales.
- - Seasonal trends -- The Company experiences some seasonal trends in the sale of
its products. For example, sales to governments (particularly U.S. federal
sales) are often stronger in the Company's third quarter, European sales are
often weaker in the third quarter and consumer sales are often stronger in the
fourth quarter. Historically, the net result of seasonal trends has not been
material relative to the Company's overall results of operations, but many of
the factors that create and affect seasonal trends are beyond the Company's
control.
- - Technological changes and product transitions -- The computer industry is
characterized by continuing improvements in technology, which result in the
frequent introduction of new products, short product life cycles and continual
improvement in product price/performance characteristics. While the Company
believes that its direct business model and asset management practices afford
it an inherent competitive advantage over some of its competitors, product
transitions present some of the greatest executional challenges and risks for
any computer systems company. A failure on the part of the Company to
effectively manage a product transition will directly affect the demand for
the Company's products and the profitability of the Company's operations. In
addition, while the Company has meaningful relationships with some of the
world's most advanced technology companies, continuing technological
advancement, which is a significant driver of customer demand, is largely
beyond the control of the Company.
- - Inventory levels -- The Company's direct business model gives it the ability
to operate with reduced levels of component and finished goods inventories,
and the Company's financial success in recent periods has been due in part to
its asset management practices, including its ability to achieve rapid
inventory turns. The Company's ability to aggressively manage its inventory
has been enhanced by favorable supply conditions in the industry. Less
favorable supply conditions, as well as other factors beyond the Company's
control, may require or result in increased inventory levels in the future.
- - Supply sources -- The Company's manufacturing process requires a high volume
of quality components that are procured from third party suppliers. Reliance
on suppliers, as well as industry supply conditions, generally involves
several risks, including the possibility of defective parts (which can
adversely affect the reliability and reputation of the Company's products), a
shortage of components and reduced control over delivery schedules (which can
adversely affect the Company's manufacturing efficiencies) and increases in
component costs (which can adversely affect the Company's profitability).
The Company has several single-sourced supplier relationships, either because
alternative sources are not available or the relationship is advantageous due
to performance, quality,
9
<PAGE> 11
support, delivery, capacity or price considerations. If these sources are
unable to provide timely and reliable supply, the Company could experience
manufacturing delays or inefficiencies, adversely affecting its results of
operations.
- - Risk on financial instruments -- The Company regularly utilizes derivative
instruments to hedge its exposure to fluctuations in foreign currency exchange
rates and interest rates. In addition, the Company utilizes equity instrument
contracts to execute repurchases of its common stock under its
Board-authorized stock repurchase program. Some of these instruments and
contracts may involve elements of market and credit risk in excess of the
amounts recognized in the financial statements.
- - Strength of infrastructure -- The Company has grown at a rapid pace, requiring
enhancement and expansion of its management team, information systems,
manufacturing operations and other aspects of its infrastructure. The
Company's continued success and profitability partly depends on its ability to
continue to improve its infrastructure (particularly management and
information systems) to keep pace with the growth in its overall business
activities.
- - Patent rights -- The Company's continued business success may be largely
dependent on its ability to obtain licenses to intellectual property developed
by others on commercially reasonable and competitive terms. If the Company or
its suppliers are unable to obtain desirable technology licenses, the Company
could be prohibited from marketing products, could be forced to market
products without desirable features or could incur substantial costs to
redesign its products, defend legal actions or pay damages.
- - Year 2000 Compliance -- Computers, software and other equipment utilizing
microprocessors that use only two digits to identify a year in a date field
may be unable to process accurately certain date-based information at or after
the year 2000. This is commonly referred to as the "Year 2000 issue," and the
Company is addressing this issue on several different fronts. First, all
Dell-branded hardware products shipped since the end of 1996 are Year 2000
compliant; earlier Dell-branded hardware products can be made Year 2000
compliant through BIOS upgrades or software patches. The Company has assigned
a team to monitor product compliance and has created a website at
www.dell.com/year2000 containing additional information about the Year 2000
issue and the Company's compliance program. Second, the Company has requested
Year 2000 compliance certification from each of its major vendors and
suppliers for their hardware or software products and for their internal
business applications and processes. Finally, the Company has established a
separate team to coordinate solutions to the Year 2000 issue for its own
internal information systems, with a goal of having all of its internal
systems Year 2000 compliant by the end of 1998. The Company currently does not
expect that the cost of its Year 2000 compliance program will be material to
its financial condition or results of operations or that its business will be
adversely affected by the Year 2000 issue in any material respect.
Nevertheless, achieving Year 2000 compliance is dependent on many factors,
some of which are not completely within the Company's control. Should either
the Company's internal systems or the internal systems of one or more
significant vendors or suppliers fail to achieve Year 2000 compliance, the
Company's business and its results of operations could be adversely affected.
TRADEMARKS AND SERVICEMARKS
Several United States trademarks and service marks appear in this Report. Dell,
the Dell logo, Dell Dimension, Latitude, OptiPlex and PowerEdge are registered
trademarks of the Company, and DellWare, ReadyWare and SelectCare are registered
service marks. Inspiron and OptiFrame are trademarks of the Company, and
BusinessCare, DirectLine Premier Access and Premier Page are service marks. This
Report also contains trademarks and tradenames of other entities; the Company
disclaims proprietary interest in the marks and names of others.
10
<PAGE> 12
ITEM 2 -- PROPERTIES
At February 1, 1998, the Company owned or leased a total of approximately 4.2
million square feet of office, manufacturing and warehouse space worldwide, 3.1
million square feet of which is located in the United States and the remainder
is located in various international areas.
Domestic Properties -- The Company's principal offices and U.S. manufacturing
and warehousing facilities are located in the Austin, Texas area. At February 1,
1998, the Company had a total of approximately 1.9 million square feet of
office, manufacturing and warehouse space under lease in several buildings in
Austin and Round Rock, Texas. The expiration dates of such leases range from May
1998 to March 2005. The Company owns 360 acres of land in Round Rock, Texas
(north of Austin), on which are located several office buildings completed since
August 1994 that contain an aggregate of approximately 1.2 million square feet
of office space. These buildings, comprising the Company's Round Rock campus,
house the Company's sales, marketing and support staff for the Americas region,
as well as the Company's executive headquarters and administrative support
functions. The Company also leases 570 acres of land in Austin, 120 of which
were acquired in September 1997 and the remainder of which was acquired in
February 1998. The Company intends to utilize this acreage for a manufacturing
campus and has already announced plans to construct a 300,000 square-foot server
and workstation manufacturing facility on a portion of this acreage.
International Properties -- At February 1, 1998, the Company's international
facilities consisted of (a) approximately 487,000 square feet of leased office
space in 27 countries (with lease expiration dates ranging from 1998 to 2013),
(b) a Company owned 300,000-square-foot manufacturing and warehousing facility
in Limerick, Ireland and (c) a Company owned 238,000-square-foot combination
office and manufacturing facility in Penang, Malaysia (located on land leased
until the year 2053 from the State Authority of Penang). In addition, in January
1998, the Company announced plans to acquire an additional manufacturing
facility in Limerick, Ireland. This facility consists of approximately 35 acres
of land and a building containing approximately 340,000 square feet of
manufacturing and office space. The Company expects to complete this acquisition
in April 1998 and expects to use this facility to manufacture servers and
workstations for the European region.
The Company is evaluating other opportunities to expand facilities in
anticipation of increasing needs. The Company believes that it can readily
obtain appropriate additional space as may be required at competitive rates.
ITEM 3 -- LEGAL PROCEEDINGS
The Company is subject to various legal proceedings and claims arising in the
ordinary course of business. The Company's management does not expect that the
results in any of these legal proceedings will have a material adverse effect on
the Company's financial condition, results of operations or cash flows.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's stockholders, through the
solicitation of proxies or otherwise, during the fourth quarter of fiscal 1998.
11
<PAGE> 13
PART II
ITEM 5 -- MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's common stock is traded on The Nasdaq National Market under the
symbol "DELL." Information regarding the market prices of the Company's common
stock may be found in Note 13 of Notes to Consolidated Financial Statements
included in "Item 8 -- Financial Statements and Supplementary Data" below.
HOLDERS
As of March 31, 1998, there were 8,891 holders of record of the Company's common
stock.
DIVIDENDS
The Company has never paid cash dividends on its common stock. The Company
intends to retain its earnings for use in its business and, therefore, does not
anticipate paying any cash dividends on the common stock for at least the next
twelve months.
On each of March 6, 1998 and July 25, 1997, the Company effected a two-for-one
common stock split by paying a 100% stock dividend to stockholders of record as
of February 27, 1998 and July 18, 1997, respectively.
ITEM 6 -- SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Consolidated Financial Statements, including the related notes, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------------------------------
FEBRUARY 1, FEBRUARY 2, JANUARY 28, JANUARY 29, JANUARY 30,
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Results of Operations Data:
Net revenue............................... $12,327 $7,759 $5,296 $3,475 $2,873
Gross margin.............................. $ 2,722 $1,666 $1,067 $ 738 $ 433
Operating income (loss)................... $ 1,316 $ 714 $ 377 $ 249 $ (39)
Income (loss) before extraordinary loss... $ 944 $ 531 $ 272 $ 149 $ (36)
Net income (loss)......................... $ 944 $ 518 $ 272 $ 149 $ (36)
Income (loss) before extraordinary loss
per common share(a)(b):
Basic................................ $ 1.44 $ 0.75 $ 0.36 $ 0.23 $(0.07)
Diluted.............................. $ 1.28 $ 0.68 $ 0.33 $ 0.19 $(0.07)
Weighted average shares(a):
Basic................................ 658 710 716 618 597
Diluted.............................. 738 782 790 750 597
Balance Sheet Data:
Working capital........................... $ 1,215 $1,089 $1,018 $ 718 $ 510
Total assets.............................. $ 4,268 $2,993 $2,148 $1,594 $1,140
Long-term debt............................ $ 17 $ 18 $ 113 $ 113 $ 100
Total stockholders' equity................ $ 1,293 $ 806 $ 973 $ 652 $ 471
</TABLE>
- ---------------
(a) The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," in the fiscal year ended February 1, 1998. All
historical earnings per share data have been restated to conform to this
presentation. Additionally, all share and per share information has been
retroactively restated to reflect the two-for-one splits of the common stock
in March 1998 and July 1997. See Note 1 and Note 7 of Notes to Consolidated
Financial Statements.
(b) Excludes extraordinary loss of $0.02 basic per common share and $0.02
diluted per common share for fiscal 1997. See Note 2 of Notes to
Consolidated Financial Statements.
12
<PAGE> 14
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company's objective is to maximize stockholder value by executing a strategy
that focuses on a balance of three priorities: growth, profitability and
liquidity. The following discussion highlights the Company's performance in the
context of these priorities. This discussion should be read in conjunction with
the Consolidated Financial Statements.
RESULTS OF OPERATIONS
The following table summarizes the results of the Company's operations for each
of the past three fiscal years. All percentage amounts were calculated using the
underlying data in thousands.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------------------------
FEBRUARY 1, FEBRUARY 2, JANUARY 28,
1998 INCREASE 1997 INCREASE 1996
----------- -------- ----------- -------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net revenue................................ $12,327 59% $7,759 47% $5,296
Gross margin............................... $ 2,722 63% $1,666 56% $1,067
Percentage of net revenue................ 22.1% 21.5% 20.2%
Operating expenses......................... $ 1,406 48% $ 952 38% $ 690
Percentage of net revenue................ 11.4% 12.3% 13.1%
Operating income........................... $ 1,316 84% $ 714 90% $ 377
Percentage of net revenue................ 10.7% 9.2% 7.1%
Net income available to common
stockholders............................. $ 944 83% $ 518 99% $ 260
</TABLE>
Net Revenue
The Company has become one of the top three computer vendors in the world as a
result of its continued revenue growth. The increases in consolidated net
revenue for both fiscal 1998 and fiscal 1997 were principally due to increased
units sold. Unit shipments grew 60% and 55% for fiscal years 1998 and 1997,
respectively.
The unit volume growth in fiscal 1998 resulted from increased demand for the
Company's products across all product lines. This growth was driven by the
Company's continued sales efforts to win new customer accounts through
aggressive pricing actions and to increase market penetration of new and
higher-end products, including products incorporating Intel's Pentium(R) Pro and
Pentium II processors of speeds greater than 200MHz. While desktop products
continue to be the primary driver of unit volumes (comprising 84% of total unit
shipments in fiscal 1998), the growth rates in both the enterprise (the
combination of servers and workstations) and notebook product lines exceeded the
growth rate in desktops during fiscal 1998. Unit sales of desktop computers
increased 55%, while unit sales of enterprise and notebook computers increased
265% and 66%, respectively, during fiscal 1998.
Average revenue per unit in fiscal 1998 remained relatively stable compared to
fiscal 1997. Although aggressive pricing in the desktop product line adversely
affected average revenue per unit, this was partially offset by increases in the
enterprise and notebook product lines, primarily due to a migration to
higher-end enterprise and higher-platform notebook systems.
The unit volume increase in fiscal 1997 was also a result of increased demand
for the Company's products across all product lines. In particular, demand for
enterprise products resulted in unit growth of 160% in fiscal 1997, compared to
a 37% decrease in units in fiscal 1996. Additionally in fiscal 1997, the Company
continued to introduce products utilizing latest technology, including products
incorporating Intel's Pentium and Pentium Pro processors with speeds at the
200MHz level.
13
<PAGE> 15
The Company experienced growth in net revenue in all geographic regions in both
fiscal 1998 and fiscal 1997. The following table summarizes the Company's net
revenue by geographic region for each of the past three fiscal years:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------------------------
FEBRUARY 1, 1998 FEBRUARY 2, 1997 JANUARY 28, 1996
---------------- ----------------- -----------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Net revenue:
Americas............................... $ 8,531 69% $5,279 68% $3,474 66%
Europe................................. 2,956 24 2,004 26 1,478 28
Asia-Pacific and Japan................. 840 7 476 6 344 6
------- ---- ------ ---- ------ ----
Consolidated net revenue................. $12,327 100% $7,759 100% $5,296 100%
======= ==== ====== ==== ====== ====
</TABLE>
In the Americas region, where efforts have allowed the Company to build valuable
supplier and customer relationships, net revenue grew 62% and 52% in fiscal 1998
and fiscal 1997, respectively. In the European region, substantially all
countries experienced revenue growth in both fiscal 1998 and fiscal 1997. This
allowed Europe to increase revenue 48% and 36% in fiscal 1998 and fiscal 1997,
respectively. Asia-Pacific and Japan revenues increased 77% in fiscal 1998
compared to a 38% increase in fiscal 1997.
Management believes that opportunity exists for continued worldwide growth by
increasing the Company's market presence in existing markets, entering new
markets and pursuing additional product opportunities. In fiscal 1998, the
Company continued to drive revenue growth through its Internet Web site located
at www.dell.com. By fiscal year-end, revenue generated through this venue
exceeded $4 million a day. Management believes that the Internet will continue
to be a significant sales and service medium for the Company in the future.
Additionally in fiscal 1998, the Company expanded its product offerings to
include high-performance workstations, and formed a business unit dedicated to
workstations in order to grow this product line. As a result of these and other
opportunities, the Company has announced plans to acquire an additional
manufacturing facility in Limerick, Ireland and to construct an additional
manufacturing facility in Austin, Texas and a manufacturing facility in Xiamen,
China.
Gross Margin
The increase in gross margin as a percentage of net revenue in fiscal 1998 over
fiscal 1997 was the result of several factors, including component cost declines
(which were partially offset by price reductions), manufacturing efficiencies
and an overall shift in mix to higher-end servers and higher-priced notebook
platforms. Additionally in fiscal 1998, the Company experienced a higher mix of
Intel's Pentium Pro and Pentium II processors with speeds greater than 200MHz.
This contributed to the demand for higher-performance products, which typically
carry higher gross margins. The Company's direct business model involves the
maintenance of low levels of inventory. Consequently, component cost declines
can have a significant impact on overall product costs and gross margin. During
fiscal 1998, significant component cost declines occurred (particularly
mid-year, in memory components), causing a decline in overall product costs.
However, the Company's aggressive pricing strategies mitigated the impact of
these cost declines on gross margin. Gross margin also benefited as the Company
successfully migrated customers to higher-end enterprise systems with additional
options for external storage capacity and higher-platform notebook computers.
The mix of enterprise and notebook products increased to 9% and 20% of system
revenue, respectively, compared with 4% and 18%, respectively, during the prior
fiscal year.
The gross margin increase as a percentage of consolidated net revenue in fiscal
1997 resulted primarily from component cost declines (which were partially
offset by price reductions) and a product mix shift to notebooks, servers and
higher-end desktop products. Additionally, during fiscal
14
<PAGE> 16
1996 the Company experienced a problematic product transition involving certain
of its OptiPlex desktop products, which had an adverse effect on gross margin.
Operating Expenses
The following table presents certain information regarding the Company's
operating expenses during each of the last three fiscal years:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------
FEBRUARY 1, FEBRUARY 2, JANUARY 28,
1998 1997 1996
----------- ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Operating expenses:
Selling, general and administrative................... $1,202 $ 826 $ 595
Percentage of net revenue.......................... 9.8% 10.7% 11.3%
Research, development and engineering................. $ 204 $ 126 $ 95
Percentage of net revenue.......................... 1.6% 1.6% 1.8%
Total operating expenses................................ $1,406 $ 952 $ 690
Percentage of net revenue............................. 11.4% 12.3% 13.1%
</TABLE>
Selling, general and administrative expenses increased in absolute dollar
amounts but declined as a percentage of net revenue for both fiscal 1998 and
1997. The increase in absolute dollars was due primarily to the Company's
increased staffing worldwide and increased infrastructure expenses, including
information systems, to support the Company's continued growth. The decline in
selling, general and administrative expense as a percentage of net revenue
resulted from significant net revenue growth.
The Company continues to fund research, development and engineering activities
to meet the demand for swift product cycles. As a result, research, development
and engineering expenses have increased each year in absolute dollars due to
increased staffing levels and product development costs. The Company expects to
continue to increase research, development and engineering spending in absolute
dollar amounts in order to invest in new products.
The Company believes that its ability to manage operating costs is an important
factor in its ability to remain competitive and successful. The Company will
continue to invest in information systems, personnel and other infrastructure,
and in research, development and engineering activities, to support its growth
and to provide for new, competitive products. Although operating expenses are
expected to increase in absolute dollar terms, the Company's goal is to manage
these expenses, over time, relative to its net revenue and gross margin.
Operating Income
While delivering annual revenue growth of 59% and 47% in fiscal years 1998 and
1997, respectively, the Company has grown operating income by 84% in fiscal 1998
and 90% in fiscal 1997. This reflects the Company's ability to manage operating
expenses in relation to growth in gross margin to deliver strong operating
performance.
Financing and Other
Financing and other increased $19 million in fiscal 1998 from fiscal 1997 to $52
million primarily as a result of increased investment income due to increased
average marketable securities balances. Also, financing and other increased $27
million in fiscal 1997 from fiscal 1996 to $33 million due to increased
investment income and decreased interest expense.
15
<PAGE> 17
Income Taxes
The Company's effective tax rate was 31% for fiscal 1998 compared to 29% for
both fiscal 1997 and 1996. The increase in the effective tax rate resulted from
changes in the geographical distribution of income and losses. As a result of
the Company's geographical distribution of income, the Company's effective tax
rate is lower than the U.S. federal statutory rate of 35%.
LIQUIDITY AND CAPITAL RESOURCES
The following table presents selected financial statistics and information for
each of the past three fiscal years:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------
FEBRUARY 1, FEBRUARY 2, JANUARY 28,
1998 1997 1996
----------- ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Cash and marketable securities......................... $1,844 $1,352 $ 646
Working capital........................................ $1,215 $1,089 $1,018
Days of sales in accounts receivable................... 36 37 42
Days of supply in inventory............................ 7 13 31
Days in accounts payable............................... 51 54 33
</TABLE>
During fiscal 1998, the Company generated $1.6 billion in cash flows from
operating activities, which represents the Company's principal source of cash.
Cash flows from operating activities benefited from increased net income and
continued asset management focus.
During fiscal 1998, the Company repurchased 69 million shares of its common
stock for an aggregate cost of $1.0 billion. The Company is currently authorized
to repurchase up to 100 million additional shares of its common stock and
anticipates that repurchases under this program will constitute a significant
use of future cash resources. At February 1, 1998, the Company held equity
instrument contracts that relate to the purchase of 50 million additional shares
of its common stock for an average cost of $44 per share exercisable at various
times in the first quarter of fiscal 1999 through the third quarter of fiscal
2000. For additional information regarding the Company's stock repurchase
program, see Note 7 of Notes to Consolidated Financial Statements.
The Company utilized $187 million in cash during fiscal 1998 to construct and
equip manufacturing and office facilities. The Company expects to spend
approximately $330 million to purchase capital items for manufacturing and
office facilities during fiscal 1999 to support the Company's continued growth.
During fiscal 1998, the Company replaced two revolving credit facilities with
one $250 million 5-year revolving credit facility. Additionally, during fiscal
1996, the Company entered into a transaction that gives the Company the ability
to raise up to $150 million through a receivables securitization facility. At
both February 1, 1998, and February 2, 1997, these facilities were unused.
During fiscal 1998, the Company entered into a $227 million master lease
facility, which allows the Company to lease certain real property, buildings and
equipment to be constructed or acquired. At February 1, 1998, $43 million of
this facility had been utilized.
In March 1998, the Company filed a registration statement with the U.S.
Securities and Exchange Commission related to $500 million of debt securities.
Presently, no securities under this registration are issued or outstanding.
Management believes that the Company has sufficient resources from cash provided
from operations and available borrowings to support its operations and capital
requirements for at least the next twelve months.
16
<PAGE> 18
MARKET RISK
The Company is exposed to a variety of risks, including foreign currency
fluctuations and changes in the market value of its investments. In the normal
course of business, the Company employs established policies and procedures to
manage its exposure to fluctuations in foreign currency values and changes in
the market value of its investments.
Foreign Currency Hedging Activities
The Company's objective in managing its exposure to foreign currency exchange
rate fluctuations is to reduce the impact of adverse fluctuations in earnings
and cash flows associated with foreign currency exchange rate changes.
Accordingly, the Company utilizes foreign currency option contracts and forward
contracts to hedge its exposure on anticipated transactions and firm
commitments. The principal currencies hedged are the British pound, Japanese
yen, German mark, French franc and Canadian dollar. The Company monitors its
foreign exchange exposures daily to ensure the overall effectiveness of its
foreign currency hedge positions. However, there can be no assurance the
Company's foreign currency hedging activities will substantially offset the
impact of fluctuations in currency exchange rates on its results of operations
and financial position.
Based on the Company's foreign exchange instruments outstanding at February 1,
1998, the Company estimates a maximum potential one-day loss in fair value of
$12 million, using a Value-at-Risk ("VAR") model. The VAR model estimates were
made assuming normal market conditions and a 95% confidence level. There are
various types of modeling techniques that can be used in a VAR computation; the
Company used a Monte Carlo simulation type model that valued its foreign
currency instruments against a thousand randomly generated market price paths.
Anticipated transactions, firm commitments, receivables and accounts payable
denominated in foreign currencies were excluded from the model. The VAR model is
a risk estimation tool, and as such is not intended to represent actual losses
in fair value that will be incurred by the Company. Additionally, as the Company
utilizes foreign currency instruments for hedging anticipated and firmly
committed transactions, a loss in fair value for those instruments is generally
offset by increases in the value of the underlying exposure. Foreign currency
fluctuations did not have a material impact on the Company during fiscal years
1998, 1997 and 1996.
Marketable Securities
The fair value of the Company's investments in marketable securities at February
1, 1998 was $1.5 billion. The Company's investment policy is to manage its
marketable securities portfolio to preserve principal and liquidity while
maximizing the return on the investment portfolio through the full investment of
available funds. The Company diversifies the marketable securities portfolio by
investing in multiple types of investment-grade securities and through the use
of different investment brokers. The Company's marketable securities portfolio
is primarily invested in short-term securities with at least an investment grade
rating to minimize interest rate and credit risk as well as to provide for an
immediate source of funds. Based on the Company's marketable securities
portfolio and interest rates at February 1, 1998, a 175 basis point increase or
decrease in interest rates would result in a decrease or increase of $17
million, respectively, in the fair value of the marketable securities portfolio.
Although changes in interest rates may affect the fair value of the marketable
securities portfolio and cause unrealized gains or losses, such gains or losses
would not be realized unless the investments are sold.
FACTORS AFFECTING THE COMPANY'S BUSINESS AND PROSPECTS
There are numerous factors that may affect the Company's business and the
results of its operations. These factors include general economic and business
conditions; the level of demand for personal computers; the level and intensity
of competition in the personal computer industry and the pricing pressures that
may result; the ability of the Company to timely and effectively manage
17
<PAGE> 19
periodic product transitions and component availability; the ability of the
Company to develop new products based on new or evolving technology and the
market's acceptance of those products; the ability of the Company to manage its
inventory levels to minimize excess inventory, declining inventory values and
obsolescence; the product, customer and geographic sales mix of any particular
period; the Company's ability to continue to improve its infrastructure
(including personnel and systems) to keep pace with the growth in its overall
business activities; and the Company's ability to ensure its products and
information systems and those of its third party providers will be Year 2000
compliant. For a discussion of these and other factors affecting the Company's
business and prospects, see "Item 1 -- Business -- Factors Affecting the
Company's Business and Prospects" above.
ITEM 7A -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Response to this item is included in "Item 7 -- Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Market Risk" above.
18
<PAGE> 20
ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Financial Statements:
Report of Independent Accountants......................... 20
Consolidated Statement of Financial Position at February
1, 1998 and February 2, 1997........................... 21
Consolidated Statement of Income for the three fiscal
years ended February 1, 1998........................... 22
Consolidated Statement of Cash Flows for the three fiscal
years ended February 1, 1998........................... 23
Consolidated Statement of Stockholders' Equity for the
three fiscal years ended February 1, 1998.............. 24
Notes to Consolidated Financial Statements................ 25
Financial Statement Schedule:
For the three fiscal years ended February 1, 1998
Schedule II -- Valuation and Qualifying Accounts....... 58
</TABLE>
All other schedules are omitted because they are not applicable.
19
<PAGE> 21
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Dell Computer Corporation
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of Dell
Computer Corporation and its subsidiaries at February 1, 1998 and February 2,
1997, and the results of their operations and their cash flows for each of the
three fiscal years in the period ended February 1, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Austin, Texas
February 16, 1998
20
<PAGE> 22
DELL COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(IN MILLIONS)
ASSETS
<TABLE>
<CAPTION>
FEBRUARY 1, FEBRUARY 2,
1998 1997
----------- -----------
<S> <C> <C>
Current assets:
Cash...................................................... $ 320 $ 115
Marketable securities..................................... 1,524 1,237
Accounts receivable, net.................................. 1,486 903
Inventories............................................... 233 251
Other..................................................... 349 241
------ ------
Total current assets.............................. 3,912 2,747
Property, plant and equipment, net.......................... 342 235
Other....................................................... 14 11
------ ------
Total assets...................................... $4,268 $2,993
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $1,643 $1,040
Accrued and other......................................... 1,054 618
------ ------
Total current liabilities......................... 2,697 1,658
Long-term debt.............................................. 17 18
Deferred revenue on warranty contracts...................... 225 219
Other....................................................... 36 13
Commitments and contingent liabilities...................... -- --
------ ------
Total liabilities................................. 2,975 1,908
------ ------
Put options................................................. -- 279
------ ------
Stockholders' equity:
Preferred stock and capital in excess of $.01 par value;
shares issued and outstanding: none.................... -- --
Common stock and capital in excess of $.01 par value;
shares issued and outstanding: 644 and 692,
respectively........................................... 747 195
Retained earnings......................................... 607 647
Other..................................................... (61) (36)
------ ------
Total stockholders' equity........................ 1,293 806
------ ------
$4,268 $2,993
====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
21
<PAGE> 23
DELL COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(IN MILLIONS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------
FEBRUARY 1, FEBRUARY 2, JANUARY 28,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net revenue............................................. $12,327 $7,759 $5,296
Cost of revenue......................................... 9,605 6,093 4,229
------- ------ ------
Gross margin.......................................... 2,722 1,666 1,067
------- ------ ------
Operating expenses:
Selling, general and administrative................... 1,202 826 595
Research, development and engineering................. 204 126 95
------- ------ ------
Total operating expenses...................... 1,406 952 690
------- ------ ------
Operating income.............................. 1,316 714 377
Financing and other..................................... 52 33 6
------- ------ ------
Income before income taxes and extraordinary loss..... 1,368 747 383
Provision for income taxes.............................. 424 216 111
------- ------ ------
Income before extraordinary loss...................... 944 531 272
Extraordinary loss, net of taxes........................ -- (13) --
------- ------ ------
Net income............................................ 944 518 272
Preferred stock dividends............................... -- -- (12)
------- ------ ------
Net income available to common stockholders............. $ 944 $ 518 $ 260
======= ====== ======
Basic earnings per common share (in whole dollars):
Income before extraordinary loss...................... $ 1.44 $ 0.75 $ 0.36
Extraordinary loss, net of taxes...................... -- (.02) --
------- ------ ------
Earnings per common share............................. $ 1.44 $ 0.73 $ 0.36
======= ====== ======
Diluted earnings per common share (in whole dollars):
Income before extraordinary loss...................... $ 1.28 $ 0.68 $ 0.33
Extraordinary loss, net of taxes...................... -- (.02) --
------- ------ ------
Earnings per common share............................. $ 1.28 $ 0.66 $ 0.33
======= ====== ======
Weighted average shares outstanding:
Basic................................................. 658 710 716
Diluted............................................... 738 782 790
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
22
<PAGE> 24
DELL COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------
FEBRUARY 1, FEBRUARY 2, JANUARY 28,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 944 $ 518 $ 272
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization....................... 67 47 38
Other............................................... 24 29 22
Changes in:
Operating working capital............................. 529 659 (195)
Non-current assets and liabilities.................... 28 109 38
-------- ------- -------
Net cash provided by operating activities........ 1,592 1,362 175
-------- ------- -------
Cash flows from investing activities:
Marketable securities:
Purchases............................................. (12,305) (9,538) (4,545)
Maturities and sales.................................. 12,017 8,891 4,442
Capital expenditures..................................... (187) (114) (101)
-------- ------- -------
Net cash used in investing activities............ (475) (761) (204)
-------- ------- -------
Cash flows from financing activities:
Purchase of common stock................................. (1,023) (495) --
Repurchase of 11% Senior Notes........................... -- (95) --
Issuance of common stock under employee plans............ 88 57 48
Cash received from sale of equity options................ 38 -- --
Preferred stock dividends and other...................... (1) -- (14)
-------- ------- -------
Net cash (used in) provided by financing
activities..................................... (898) (533) 34
-------- ------- -------
Effect of exchange rate changes on cash.................... (14) (8) 7
-------- ------- -------
Net increase in cash....................................... 205 60 12
Cash at beginning of period................................ 115 55 43
-------- ------- -------
Cash at end of period...................................... $ 320 $ 115 $ 55
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE> 25
DELL COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN MILLIONS)
<TABLE>
<CAPTION>
PREFERRED STOCK
AND CAPITAL IN COMMON STOCK AND
EXCESS OF PAR CAPITAL IN EXCESS
VALUE OF PAR VALUE
---------------- ------------------ RETAINED
SHARES AMOUNT SHARES AMOUNT EARNINGS OTHER TOTAL
------ ------ ------- ------- -------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at January 29, 1995.......... 1 $ 120 635 $ 242 $ 311 $(21) $ 652
Net income.......................... -- -- -- -- 272 -- 272
Stock issuance under employee plans,
including tax benefits........... -- -- 33 74 -- (17) 57
Preferred stock conversion.......... (1) (114) 80 114 -- -- --
Other............................... -- -- -- -- (13) 5 (8)
Balances at January 28, 1996.......... -- 6 748 430 570 (33) 973
Net income.......................... -- -- -- -- 518 -- 518
Stock issuance under employee plans,
including tax benefits........... -- -- 6 65 -- (18) 47
Purchase and retirement of 62
million shares................... -- -- (62) (22) (388) -- (410)
Purchase and reissuance of 19
million shares for employee plans
and preferred stock conversion... -- (6) -- -- (55) -- (61)
Reclassification of put options..... -- -- -- (279) -- -- (279)
Other............................... -- -- -- 1 2 15 18
Balances at February 2, 1997.......... -- -- 692 195 647 (36) 806
Net income.......................... -- -- -- -- 944 -- 944
Stock issuance under employee plans,
including tax benefits........... -- 21 274 -- (11) 263
Purchase and retirement of 69
million shares................... -- (69) (39) (984) -- (1,023)
Reclassification of put options..... -- -- -- 279 -- -- 279
Other............................... -- -- -- 38 -- (14) 24
Balances at February 1, 1998.......... -- $ -- 644 $ 747 $ 607 $(61) $ 1,293
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE> 26
DELL COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business -- Dell Computer Corporation, a Delaware corporation
(including its consolidated subsidiaries, the "Company") designs, develops,
manufactures, markets, services and supports a wide range of computer systems,
including desktops, notebooks and enterprise systems (includes servers and
workstations), and also markets software, peripherals and service and support
programs. The Company markets its computer products and services under the
Dell(R) brand name directly to its customers. These customers include major
corporate, government, medical and education accounts, as well as
small-to-medium businesses and individuals. The Company conducts operations
worldwide through wholly owned subsidiaries; such operations are primarily
concentrated in the United States, Europe and the Asia-Pacific rim.
Fiscal Year -- The Company's fiscal year is the 52 or 53 week period ending on
the Sunday nearest January 31.
Principles of Consolidation -- The consolidated financial statements have been
prepared in accordance with generally accepted accounting principles and include
the accounts of the Company. All significant intercompany transactions and
balances have been eliminated. Certain reclassifications have been made in the
prior years for consistent presentation.
Use of Estimates -- The preparation of financial statements in accordance with
generally accepted accounting principles requires the use of management's
estimates. These estimates are subjective in nature and involve judgements that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at fiscal year end and the reported amounts of
revenues and expenses during the fiscal year. Actual results could differ from
those estimates.
Marketable Securities -- The Company's marketable securities are classified as
available-for-sale and are reported at fair value. Unrealized gains and losses
are reported, net of taxes, as a component of stockholders' equity. Unrealized
losses are charged against income when a decline in fair value is determined to
be other than temporary. The specific identification method is used to determine
the cost of securities sold. Gains and losses on marketable securities are
included in financing and other when realized. The Company accounts for highly
liquid investments with maturities of three months or less at date of
acquisition as marketable securities and reflects the related cash flows as
investing cash flows. As a result, a significant portion of its gross marketable
securities purchases and maturities disclosed as investing cash flows is related
to highly liquid investments.
Inventories -- Inventories are stated at the lower of cost or market. Cost is
determined on a first-in, first-out basis.
Property, Plant and Equipment -- Property, plant and equipment are carried at
depreciated cost. Depreciation is provided using the straight-line method over
the estimated economic lives of the assets, which range from ten to thirty years
for buildings and two to five years for all other assets. Leasehold improvements
are amortized over the shorter of five years or the lease term.
Foreign Currency Translation -- The majority of the Company's international
sales are made by international subsidiaries which have the U.S. dollar as their
functional currency. International subsidiaries which have the U.S. dollar as
the functional currency are remeasured into U.S. dollars using current rates of
exchange for monetary assets and liabilities and historical rates of exchange
for nonmonetary assets. Gains and losses from remeasurement are included in
financing and other. The Company's subsidiaries that do not have the U.S. dollar
as their functional currency translate assets and liabilities at current rates
of exchange in effect at the balance sheet date. The resulting gains and losses
from translation are included as a component of stockholders' equity. Items of
25
<PAGE> 27
income and expense for the Company's international subsidiaries are translated
using the monthly average exchange rates in effect for the period in which the
items occur.
Foreign Currency Hedging Instruments -- The Company enters into foreign exchange
contracts to hedge its foreign currency risks. These contracts must be
designated at inception as a hedge and measured for effectiveness both at
inception and on an ongoing basis. Realized and unrealized gains or losses and
premiums on foreign currency purchased option contracts that are designated and
effective as hedges of probable anticipated, but not firmly committed, foreign
currency transactions are deferred and recognized in income as a component of
revenue, cost of sales and/or operating expenses in the same period as the
hedged transaction. Forward contracts designated as hedges of probable
anticipated or firmly committed transactions are accounted for on a
mark-to-market basis, with realized and unrealized gains or losses recognized
currently.
Equity Instruments Indexed to the Company's Common Stock -- Proceeds received
upon the sale of equity instruments and amounts paid upon the purchase of equity
instruments are recorded as a component of stockholders' equity. Subsequent
changes in the fair value of the equity instrument contracts are not recognized.
If the contracts are ultimately settled in cash, the amount of cash paid or
received is recorded as a component of stockholders' equity.
Revenue Recognition -- Sales revenue is recognized at the date of shipment to
customers. Provision is made for an estimate of product returns and doubtful
accounts and is based on historical experience. Revenue from separately priced
service and extended warranty programs are deferred and recognized over the
extended warranty period.
Warranty and Other Post-sales Support Programs -- The Company provides currently
for the estimated costs that may be incurred under its initial warranty and
other post-sales support programs.
Advertising Costs -- Advertising costs are charged to expense as incurred.
Advertising expenses for fiscal years 1998, 1997 and 1996 were $137 million, $87
million and $83 million, respectively.
Stock-Based Compensation -- The Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," in the
fiscal year ended February 2, 1997. On adoption, the Company continued to apply
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," in accounting for its stock option and stock purchase plans. As a
result, no expense has been recognized for options granted with an exercise
price equal to market value at the date of grant or in connection with the
employee stock purchase plan. For stock options that have been issued at
discounted prices, the Company accrues for compensation expense over the vesting
period for the difference between the exercise price and fair market value on
the measurement date.
Income Taxes -- The provision for income taxes is based on income before income
taxes as reported in the Consolidated Statement of Income. Deferred tax assets
and liabilities are determined based on the difference between the financial
statement and tax basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
Earnings Per Common Share -- The Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share," in the fiscal year ended
February 1, 1998. Basic earnings per share is based on the weighted effect of
all common shares issued and outstanding, and is calculated by dividing net
income available to common stockholders by the weighted average shares
outstanding during the period. Diluted earnings per share is calculated by
dividing net income available to common stockholders by the weighted average
number of common shares used in the basic earnings per share calculation plus
the number of common shares that would be issued assuming conversion of all
potentially dilutive common shares outstanding. All historical earnings
26
<PAGE> 28
per share data have been restated to conform to this presentation. Below is the
calculation of basic and diluted earnings per share for each of the past three
fiscal years:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------
FEBRUARY 1, FEBRUARY 2, JANUARY 28,
1998 1997 1996
----------- ----------- -----------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net income.............................................. $ 944 $ 518 $ 272
Less: preferred stock dividends......................... -- -- (12)
----- ----- -----
Net income available to common stockholders............. $ 944 $ 518 $ 260
===== ===== =====
Weighted average shares outstanding -- Basic............ 658 710 716
Employee stock options and other........................ 80 72 74
----- ----- -----
Weighted average shares outstanding -- Diluted.......... 738 782 790
===== ===== =====
Earnings per common share:
Basic................................................. $1.44 $0.73 $0.36
Diluted............................................... $1.28 $0.66 $0.33
</TABLE>
Recently Issued Accounting Pronouncement -- On March 4, 1998, the Accounting
Standards Executive Committee of the American Institute of Certified Public
Accountants, issued Statement of Position 98-1 (SoP 98-1), "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use," which
provides guidance concerning the capitalization of costs related to such
software. The SoP 98-1 must be adopted by the Company effective as of fiscal
year 2000 and is not expected to have a material impact on the Company's
consolidated results of operations or financial position.
NOTE 2 -- FINANCIAL INSTRUMENTS
DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair value of marketable securities, long-term debt and interest rate
derivative instruments has been estimated based upon market quotes from brokers.
The fair value of foreign currency forward contracts has been estimated using
market quoted rates of foreign currencies at the applicable balance sheet date.
The estimated fair value of foreign currency purchased option contracts is based
on market quoted rates at the applicable balance sheet date and the
Black-Scholes options pricing model. Considerable judgment is necessary in
interpreting market data to develop estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the amounts that
the Company could realize in a current market exchange. Changes in assumptions
could significantly affect the estimates.
Cash, accounts receivable, accounts payable and accrued and other liabilities
are reflected in the financial statements at fair value because of the
short-term maturity of these instruments.
27
<PAGE> 29
MARKETABLE SECURITIES
The following table summarizes by major security type the fair value of the
Company's holdings of marketable securities.
<TABLE>
<CAPTION>
FEBRUARY 1, FEBRUARY 2,
1998 1997
----------- -----------
(IN MILLIONS)
<S> <C> <C>
Preferred stock............................................. $ 172 $ 172
Mutual funds, principally invested in debt securities....... 800 182
Debt securities:
State and municipal securities............................ 190 317
U.S. corporate and bank debt.............................. 307 415
U.S. government and agencies.............................. 40 98
International corporate and bank debt..................... 15 53
------ ------
Total debt securities....................................... 552 883
------ ------
Total marketable securities....................... $1,524 $1,237
====== ======
</TABLE>
At February 1, 1998 and February 2, 1997, the cost of marketable securities
approximates fair value. At February 1, 1998, debt securities with a carrying
amount of $414 million mature within one year; the remaining debt securities
mature within three years. The Company's gross realized gains and losses on the
sale of marketable securities for fiscal years 1998, 1997 and 1996 were not
material.
FOREIGN CURRENCY INSTRUMENTS
The Company uses foreign currency purchased option contracts and forward
contracts to reduce its exposure to currency fluctuations involving probable
anticipated, but not firmly committed, transactions and transactions with firm
foreign currency commitments. These transactions include international sales by
U.S. dollar functional currency entities, foreign currency denominated purchases
of certain components and intercompany shipments to certain international
subsidiaries. The risk of loss associated with purchased options is limited to
premium amounts paid for the option contracts. Foreign currency purchased
options generally expire in twelve months or less. At February 1, 1998, the
Company held purchased option contracts with a notional amount of $2.0 billion,
a carrying amount of $69 million and a combined net realized and unrealized
deferred loss of $2 million. Additionally, at February 2, 1997, the Company held
purchased option contracts with a notional amount of $1.2 billion, a carrying
amount of $33 million and a combined net realized and unrealized deferred gain
of $25 million. The risk of loss associated with forward contracts is equal to
the exchange rate differential from the time the contract is entered into until
the time it is settled. Transactions with firm foreign currency commitments are
generally hedged using foreign currency forward contracts for periods not
exceeding three months. At February 1, 1998, the Company held forward contracts
with a notional amount of $800 million, a carrying amount of $26 million and a
combined net realized and unrealized deferred gain of $10 million. At February
2, 1997, the Company held foreign currency forward contracts with a notional
amount of $207 million and a contract carrying amount of $12 million, which
represented fair value.
LONG-TERM DEBT AND INTEREST RATE RISK MANAGEMENT
During fiscal 1997, the Company repurchased $95 million of its outstanding $100
million 11% Senior Notes Due August 15, 2000 (the "Senior Notes"). As a result
of the repurchase, the Company recorded an extraordinary loss of $13 million
(net of tax benefit of $7 million). In connection with the Senior Notes, the
Company entered into interest rate swap agreements that expire on August 15,
1998. At February 1, 1998 and February 2, 1997, the Company had outstanding
receive fixed/pay floating interest rate swap agreements in the aggregate
notional amount of $100 million offset by receive floating/pay fixed interest
rate swap agreements in the aggregate notional amount of
28
<PAGE> 30
$100 million. The notional amount of both the receive fixed/pay floating
interest rate swaps and the offsetting receive floating/pay fixed interest rate
swaps was marked-to-market and included in the extraordinary loss. The weighted
average interest rate on the Senior Notes, adjusted by the swaps, was 13.8% for
fiscal years 1998, 1997 and 1996, respectively. The difference between the
Company's carrying amounts and fair value on long-term debt and related interest
rate swaps was not material at both February 1, 1998, and February 2, 1997,
respectively.
NOTE 3 -- INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------
FEBRUARY 1, FEBRUARY 2, JANUARY 28,
1998 1997 1996
----------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
Current:
Domestic.............................................. $362 $252 $102
Foreign............................................... 41 34 25
Deferred................................................ 21 (70) (16)
---- ---- ----
Provision for income taxes.............................. $424 $216 $111
==== ==== ====
</TABLE>
Income before income taxes and extraordinary loss included approximately $205
million, $223 million and $176 million related to foreign operations in fiscal
years 1998, 1997 and 1996, respectively.
The Company has not recorded a deferred income tax liability of approximately
$127 million for additional taxes that would result from the distribution of
certain earnings of its foreign subsidiaries, if they were repatriated. The
Company currently intends to reinvest indefinitely these undistributed earnings
of its foreign subsidiaries.
The components of the Company's net deferred tax asset (included in other
current assets) are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------
FEBRUARY 1, FEBRUARY 2, JANUARY 28,
1998 1997 1996
----------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
Provisions for product returns and doubtful accounts.... $ 20 $ 31 $ 25
Inventory and warranty provisions....................... 24 21 18
Deferred service contract revenue....................... 124 107 53
Other................................................... (62) (26) (29)
---- ---- ----
Net deferred tax asset.................................. $106 $133 $ 67
==== ==== ====
</TABLE>
The effective tax rate differed from statutory U.S. federal income tax rate as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------
FEBRUARY 1, FEBRUARY 2, JANUARY 28,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
U.S. federal statutory rate............................. 35.0% 35.0% 35.0%
Foreign income taxed at different rates................. (4.6)% (6.2)% (6.0)%
Other................................................... 0.6% 0.2% --
------ ------ ------
Effective tax rates..................................... 31.0% 29.0% 29.0%
====== ====== ======
</TABLE>
29
<PAGE> 31
NOTE 4 -- JOINT VENTURE
During fiscal 1998, the Company and Newcourt Credit Group Inc. formed a joint
venture, Dell Financial Services L.P. ("DFS"), to provide leasing and asset
management services to the Company's customers. The Company has a 70% interest
in DFS; however, as the Company does not exercise control over DFS, it accounts
for the investment under the equity method. Dell Credit Company L.L.C., which is
owned 50% by the Company and 50% by Newcourt, is the sole general partner of DFS
and, as such, is liable for the obligations of DFS. Operations of DFS for fiscal
year 1998 were not material to the Company.
NOTE 5 -- FINANCING ARRANGEMENTS
During fiscal 1997, the Company entered into a $100 million 364-day revolving
credit facility and a $150 million 3-year revolving credit facility. During
fiscal 1998, the Company replaced the two separate facilities with one $250
million 5-year revolving credit facility. Additionally during fiscal 1996, the
Company entered into a transaction that gives the Company the ability to raise
up to $150 million through a receivables securitization facility. Commitment
fees for each of these facilities are paid quarterly and are based on specific
liquidity requirements. Commitment fees paid in both fiscal 1998 and 1997 were
not material to the Company. At both February 1, 1998 and February 2, 1997,
these facilities were unused.
NOTE 6 -- PREFERRED STOCK
The Company has the authority to issue 5 million shares of preferred stock, par
value $.01 per share.
Series A Convertible Preferred Stock -- During fiscal 1996, the Company offered
to pay a cash premium of $8.25 for each outstanding share of Series A
Convertible Preferred Stock that was converted to common stock. Holders of 1
million shares of Series A Convertible Preferred Stock elected to convert and,
as a result, received an aggregate of approximately 20 million shares of common
stock and $10 million in cash during fiscal 1996. During fiscal 1997, the
remaining 60,000 shares of Series A Convertible Preferred Stock were converted
into common stock in accordance with their terms, resulting in the issuance of
an additional 1 million shares of common stock.
Series A Junior Participating Preferred Stock -- In conjunction with the
distribution of Preferred Share Purchase Rights (see Note 9 -- Preferred Share
Purchase Rights), the Company's Board of Directors designated 200,000 shares of
preferred stock as Series A Junior Participating Preferred Stock ("Junior
Preferred Stock") and reserved such shares for issuance upon exercise of the
Preferred Share Purchase Rights. At February 1, 1998 and February 2, 1997, no
shares of Junior Preferred Stock were issued or outstanding.
NOTE 7 -- COMMON STOCK
Authorized Shares -- During fiscal 1998, the Company's stockholders approved an
increase in the number of authorized shares of common stock to one billion from
three hundred million at the end of fiscal 1997.
Stock Split -- On each of March 6, 1998 and July 25, 1997, the Company effected
a two-for-one common stock split by paying a 100% stock dividend to stockholders
of record as of February 27, 1998 and July 18, 1997, respectively. All share and
per share information has been retroactively restated in the Consolidated
Financial Statements to reflect these stock splits.
Stock Repurchase Program -- The Board of Directors has authorized the Company to
repurchase up to 250 million shares of its common stock in open market or
private transactions. During fiscal 1998 and fiscal 1997, the Company
repurchased 69 million and 81 million shares of its common stock, respectively,
for an aggregate cost of $1.0 billion and $503 million, respectively. The
Company utilizes equity instrument contracts to facilitate its repurchase of
common stock. At
30
<PAGE> 32
February 1, 1998 and February 2, 1997, the Company held equity instrument
contracts that relate to the purchase of 50 million and 36 million shares of
common stock, respectively, at an average cost of $44 and $9 per share,
respectively. Additionally, at February 1, 1998 and February 2, 1997, the
Company has sold put obligations covering 55 million and 34 million shares,
respectively, at an average exercise price of $39 and $8, respectively. The
equity instruments are exercisable only at expiration, with the expiration dates
ranging from the first quarter of fiscal 1999 through the third quarter of
fiscal 2000.
At February 2, 1997, certain outstanding put obligations contained net cash
settlement or physical settlement terms thus resulting in a reclassification of
the maximum potential repurchase obligation of $279 million from stockholders'
equity to put warrants. The outstanding put obligations at February 1, 1998
permitted net-share settlement at the Company's option and, therefore, did not
result in a put warrant liability on the balance sheet. The equity instruments
did not have a material dilutive effect on earnings per common share for fiscal
1998 or fiscal 1997.
NOTE 8 -- BENEFIT PLANS
Incentive and Employee Stock Purchase Plans -- The Dell Computer Corporation
Incentive Plan (the "Incentive Plan"), which is administered by the Compensation
Committee of the Board of Directors, provides for the granting of incentive
awards in the form of stock options, stock appreciation rights ("SARs"),
restricted stock, stock and cash to directors, executive officers and key
employees of the Company and its subsidiaries, and certain other persons who
provide consulting or advisory services to the Company.
Options granted may be either incentive stock options within the meaning of
Section 422 of the Internal Revenue Code or nonqualified options. The right to
purchase shares under the existing stock option agreements typically vests
pro-rata at each option anniversary date over a five-year period. Stock options
must be exercised within ten years from date of grant. Stock options are
generally issued at fair market value. Under the Incentive Plan, each
nonemployee director of the Company automatically receives nonqualified stock
options annually.
The following table summarizes stock option activity:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------------------
FEBRUARY 1, 1998 FEBRUARY 2, 1997 JANUARY 28, 1996
----------------- ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ -------- ------ -------- ------ --------
(SHARE DATA IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year... 113 $ 3.89 94 $2.10 90 $1.13
Granted............................ 22 $27.21 43 $6.58 32 $3.91
Canceled........................... (5) $ 6.19 (7) $2.34 (8) $1.02
Exercised.......................... (20) $ 3.02 (17) $1.50 (20) $1.05
--- --- ---
Outstanding at end of year......... 110 $ 8.99 113 $3.89 94 $2.10
=== === ===
Exercisable at year-end............ 25 $11.90 19 $1.81 19 $1.30
</TABLE>
31
<PAGE> 33
The following is additional information relating to options outstanding as of
February 1, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
EXERCISE NUMBER AVERAGE AVERAGE NUMBER AVERAGE
PRICE OF EXERCISE CONTRACTUAL OF EXERCISE
RANGE SHARES PRICE LIFE (YEARS) SHARES PRICE
- --------------- ------ -------- ------------ ------- ---------
(SHARE DATA IN MILLIONS)
<S> <C> <C> <C> <C> <C>
$ 0.01 - $ 1.99 28 $ 1.16 5.8 12 $ 1.38
$ 2.00 - $ 4.99 27 $ 3.61 7.5 7 $ 3.47
$ 5.00 - $ 9.99 27 $ 6.16 8.3 4 $ 6.18
$10.00 - $19.99 14 $14.08 8.9 2 $11.24
$20.00 - $50.50 14 $36.00 9.4 -- $ --
--- --
110 25
=== ==
</TABLE>
During fiscal 1998, 1997 and 1996 the Company granted 1 million shares, 3
million shares and 6 million shares, respectively, of restricted stock. For
substantially all restricted stock grants, at the date of grant, the recipient
has all rights of a stockholder, subject to certain restrictions on
transferability and a risk of forfeiture. Restricted shares typically vest over
a seven-year period beginning on the date of grant and restrictions may not
extend more than ten years from the date of grant. The Company records unearned
compensation equal to the market value of the restricted shares on the date of
grant and charges the unearned compensation to expense over the vesting period.
There were 10 million, 29 million and 68 million shares of common stock
available for future grants under the Incentive Plan at February 1, 1998,
February 2, 1997, and January 28, 1996, respectively.
The Company also has an employee stock purchase plan that qualifies under
Section 423 of the Internal Revenue Code and permits substantially all employees
to purchase shares of common stock. Participating employees may purchase common
stock through payroll deductions at the end of each participation period at a
purchase price equal to 85% of the lower of the fair market value of the common
stock at the beginning or the end of the participation period. Common stock
reserved for future employee purchases under the plan aggregated 13 million
shares at February 1, 1998, 15 million shares at February 2, 1997, and 19
million shares at January 28, 1996. Shares issued under this plan were 2 million
shares in fiscal 1998, 3 million shares in fiscal 1997 and 3 million shares in
fiscal 1996.
The weighted average fair value of stock options at date of grant was $16.26,
$3.73, and $2.22 per option for options granted during fiscal years 1998, 1997,
and 1996, respectively. Additionally, the weighted average fair value of the
purchase rights under the employee stock purchase plan granted in fiscal years
1998, 1997, and 1996 was $6.11, $2.04, and $1.01 per right, respectively. The
weighted average fair value of options was determined based on the Black-Scholes
model, utilizing the following weighted average assumptions:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------------
FEBRUARY 1, 1998 FEBRUARY 2, 1997 JANUARY 28, 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
Expected term:
Stock options................................ 5 years 5 years 5 years
Employee stock purchase plan................. 6 months 6 months 6 months
Interest rate.................................. 6.28% 6.40% 6.20%
Volatility..................................... 54.92% 56.54% 57.36%
Dividends...................................... 0% 0% 0%
</TABLE>
Had the Company accounted for its stock option and stock purchase plans by
recording compensation expense based on the fair value at the grant date on a
straight line basis over the vesting period, stock-based compensation costs
would have reduced pretax income by $100 million ($69 million,
32
<PAGE> 34
net of taxes), $22 million ($16 million, net of taxes) and $8 million ($6
million, net of taxes) in fiscal 1998, 1997 and 1996, respectively. The pro
forma effect on diluted earnings per common share would have been a reduction of
$0.09, $0.02 and $0.01 for fiscal years 1998, 1997 and 1996, respectively. The
pro forma effect on basic earnings per common share would have been a reduction
of $0.11, $0.02 and $0.01 for fiscal years 1998, 1997 and 1996, respectively.
401(k) Plan -- The Company has a defined contribution retirement plan that
complies with Section 401(k) of the Internal Revenue Code. Substantially all
employees in the U.S. are eligible to participate in the plan. The Company
matches 100% of each participant's voluntary contributions, subject to a maximum
Company contribution of 3% of the participant's compensation. During each of
fiscal 1998, fiscal 1997 and fiscal 1996, the Company made discretionary
contributions for every eligible employee, regardless of whether the employee
was a plan participant, equal to 2% of the employee's actual earnings during
calendar years 1997, 1996 and 1995, respectively. The Company's matching and
discretionary contributions during fiscal years 1998, 1997 and 1996 were $20
million, $13 million and $10 million, respectively.
NOTE 9 -- PREFERRED SHARE PURCHASE RIGHTS
On November 29, 1995, the Company's Board of Directors declared a dividend of
one Preferred Share Purchase Right (a "Right") for each outstanding share of
common stock. The distribution of the Rights was made on December 13, 1995, to
the stockholders of record on that date. Each Right entitles the holder to
purchase one eight-thousandth of a share of Junior Preferred Stock at an
exercise price of $225 per one-thousandth of a share.
If a person or group acquires 15% or more of the outstanding common stock, each
Right will entitle the holder (other than such person or any member of such
group) to purchase, at the Right's then current exercise price, the number of
shares of common stock having a market value of twice the exercise price of the
Right. If exercisable, the Rights contain provisions relating to merger or other
business combinations. In certain circumstances, the Board of Directors may, at
its option, exchange part or all of the Rights (other than Rights held by the
acquiring person or group) for shares of common stock at an exchange rate of one
share of common stock for each Right.
The Company will be entitled to redeem the Rights at $.001 per Right at any time
before a 15% or greater position has been acquired by any person or group.
Additionally, the Company may lower the 15% threshold to not less than the
greater of (a) any percentage greater than the largest percentage of common
stock known by the Company to be owned by any person (other than Michael S.
Dell) or (b) 10%. The Rights expire on November 29, 2005.
Neither the ownership nor the further acquisition of common stock by Michael S.
Dell will cause the Rights to become exercisable or nonredeemable or will
trigger the other features of the Rights.
NOTE 10 -- COMMITMENTS, CONTINGENCIES AND CERTAIN CONCENTRATIONS
Lease Commitments -- During fiscal 1998, the Company entered into a master lease
facility ("Facility"), which provides for the ability to lease certain real
property, buildings and equipment to be constructed or acquired. The lessor has
agreed to fund up to $227 million under this Facility. Rent obligations for the
buildings commence on various dates.
The lease has an initial term of five years with an option to renew for two
successive years, subject to certain conditions. The Company may, at its option,
purchase the buildings during or at the end of the lease term for 100% of the
then outstanding amount expended by the lessor to construct the buildings. If
the Company does not exercise the purchase option, the Company will guarantee a
residual value of the buildings as determined by the agreement (approximately
$36 million at February 1, 1998).
33
<PAGE> 35
The Company leases other property and equipment, manufacturing facilities and
office space under noncancelable leases. Certain leases obligate the Company to
pay taxes, maintenance and repair costs.
Future minimum lease payments under all noncancelable leases as of February 1,
1998 are as follows: $21 million in 1999; $19 million in 2000; $16 million in
2001; $9 million in 2002; $7 million in 2003; and $29 million thereafter. Rent
expense totaled $36 million, $33 million and $22 million for the fiscal years
ended 1998, 1997 and 1996, respectively.
Legal Matters -- The Company is subject to various legal proceedings and claims
arising in the ordinary course of business. The Company's management does not
expect that the outcome in any of these legal proceedings, individually or
collectively, will have a material adverse effect on the Company's financial
condition, results of operations, or cash flows.
Certain Concentrations -- All of the Company's foreign exchange and interest
rate derivative instruments involve elements of market and credit risk in excess
of the amounts recognized in the financial statements. The counterparties to
financial instruments consist of a number of major financial institutions. In
addition to limiting the amount of agreements and contracts it enters into with
any one party, the Company monitors its positions with and the credit quality of
the counterparties to these financial instruments. The Company does not
anticipate nonperformance by any of the counterparties.
The Company's marketable securities are placed with high quality financial
institutions and other companies, and the Company currently invests primarily in
equity securities and debt instruments that have maturities of less than three
years. Management believes no significant concentration of credit risk for
marketable securities exists for the Company.
The Company has business activities with large corporate, government, medical
and education customers, small-to-medium businesses and individuals and
value-added resellers. Its receivables from such parties are well diversified.
The Company purchases a number of components from single sources. In some cases,
alternative sources of supply are not available. In other cases, the Company may
establish a working relationship with a single source, even when multiple
suppliers are available, if the Company believes it is advantageous to do so due
to performance, quality, support, delivery, capacity or price considerations. If
the supply of a critical single-source material or component were delayed or
curtailed, the Company's ability to ship the related product in desired
quantities and in a timely manner could be adversely affected. Even where
alternative sources of supply are available, qualification of the alternative
suppliers and establishment of reliable supplies could result in delays and a
possible loss of sales, which could affect operating results adversely.
NOTE 11 -- GEOGRAPHIC AREA INFORMATION
The Company operates in one principal business segment across geographically
diverse markets. The Americas region includes the United States, Canada and
Latin America. Substantially all of the
34
<PAGE> 36
Americas' operating results and identifiable assets are in the United States.
Transfers between geographic areas are recorded using internal transfer prices
set by the Company.
<TABLE>
<CAPTION>
FISCAL YEAR 1998
--------------------------------------------------------------
ASIA PACIFIC
AMERICAS EUROPE AND JAPAN ELIMINATIONS CONSOLIDATED
-------- ------ ------------ ------------ ------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated customers......... $8,531 $2,956 $840 $ -- $12,327
Transfers between geographic areas...... 67 17 -- (84) --
------ ------ ---- ----- -------
Total sales................... $8,598 $2,973 $840 $ (84) $12,327
====== ====== ==== ===== =======
Operating income........................ $1,152 $ 255 $ 33 $ -- $ 1,440
====== ====== ==== =====
Corporate expenses...................... (124)
-------
Total operating income........ $ 1,316
=======
Identifiable assets..................... $1,363 $ 605 $172 $ -- $ 2,140
====== ====== ==== =====
General corporate assets................ 2,128
-------
Total assets.................. $ 4,268
=======
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR 1997
--------------------------------------------------------------
ASIA PACIFIC
AMERICAS EUROPE AND JAPAN ELIMINATIONS CONSOLIDATED
-------- ------ ------------ ------------ ------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated customers......... $5,279 $2,004 $476 $ -- $ 7,759
Transfers between geographic areas...... 50 32 -- (82) --
------ ------ ---- ----- -------
Total sales................... $5,329 $2,036 $476 $ (82) $ 7,759
====== ====== ==== ===== =======
Operating income (loss)................. $ 609 $ 193 $ (6) $ -- $ 796
====== ====== ==== =====
Corporate expenses...................... (82)
-------
Total operating income........ $ 714
=======
Identifiable assets..................... $ 903 $ 390 $125 $ -- $ 1,418
====== ====== ==== =====
General corporate assets................ 1,575
-------
Total assets.................. $ 2,993
=======
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR 1996
--------------------------------------------------------------
ASIA PACIFIC
AMERICAS EUROPE AND JAPAN ELIMINATIONS CONSOLIDATED
-------- ------ ------------ ------------ ------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated customers......... $3,474 $1,478 $344 $ -- $ 5,296
Transfers between geographic areas...... 66 192 -- (258) --
------ ------ ---- ----- -------
Total sales................... $3,540 $1,670 $344 $(258) $ 5,296
====== ====== ==== ===== =======
Operating income (loss)................. $ 285 $ 171 $(21) $ -- $ 435
====== ====== ==== =====
Corporate expenses...................... (58)
-------
Total operating income........ $ 377
=======
Identifiable assets..................... $ 867 $ 409 $123 $ -- $ 1,399
====== ====== ==== =====
General corporate assets................ 749
-------
Total assets.................. $ 2,148
=======
</TABLE>
35
<PAGE> 37
NOTE 12 -- SUPPLEMENTAL CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FEBRUARY 1, FEBRUARY 2,
1998 1997
----------- -----------
(IN MILLIONS)
<S> <C> <C>
SUPPLEMENTAL CONSOLIDATED STATEMENT OF FINANCIAL POSITION INFORMATION
Accounts receivable:
Gross accounts receivable................................. $1,514 $ 934
Allowance for doubtful accounts........................... (28) (31)
------ -----
$1,486 $ 903
====== =====
Inventories:
Production materials...................................... $ 189 $ 223
Work-in-process and finished goods........................ 44 28
------ -----
$ 233 $ 251
====== =====
Property, plant and equipment:
Land and buildings........................................ $ 137 $ 133
Computer equipment........................................ 135 104
Office furniture and fixtures............................. 45 32
Machinery and other equipment............................. 126 59
Leasehold improvements.................................... 66 46
------ -----
Total property, plant and equipment....................... 509 374
Accumulated depreciation and amortization................. (167) (139)
------ -----
$ 342 $ 235
====== =====
Accrued and other liabilities:
Accrued compensation...................................... $ 236 $ 113
Deferred revenue on warranty contracts.................... 193 126
Book overdrafts........................................... 146 27
Accrued warranty costs.................................... 139 111
Taxes other than income taxes............................. 122 74
Other..................................................... 218 167
------ -----
$1,054 $ 618
====== =====
</TABLE>
36
<PAGE> 38
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------
FEBRUARY 1, FEBRUARY 2, JANUARY 28,
1998 1997 1996
----------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
SUPPLEMENTAL CONSOLIDATED STATEMENT OF INCOME INFORMATION
Research, development and engineering expenses:
Research and development expenses....................... $ 145 $ 88 $ 62
Engineering expenses.................................... 59 38 33
----- ----- -----
$ 204 $ 126 $ 95
===== ===== =====
Financing and other:
Interest expense........................................ $ (3) $ (7) $ (15)
Investment and other income, net........................ 55 40 21
----- ----- -----
$ 52 $ 33 $ 6
===== ===== =====
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS INFORMATION
Changes in operating working capital accounts:
Accounts receivable, net................................ $(638) $(200) $(196)
Inventories............................................. 16 177 (138)
Accounts payable........................................ 638 581 59
Accrued and other liabilities........................... 644 141 126
Other, net.............................................. (131) (40) (46)
----- ----- -----
$ 529 $ 659 $(195)
===== ===== =====
Supplemental cash flow information:
Income taxes paid....................................... $ 274 $ 178 $ 117
Interest paid........................................... $ 3 $ 12 $ 17
</TABLE>
NOTE 13 -- UNAUDITED QUARTERLY RESULTS
The following tables contain selected unaudited Consolidated Statement of Income
and stock price data for each quarter of fiscal 1998 and 1997.
<TABLE>
<CAPTION>
FISCAL YEAR 1998
---------------------------------------------------
4TH 3RD 2ND 1ST
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenues.............................................. $3,737 $3,188 $2,814 $2,588
Gross margin.............................................. $ 822 $ 718 $ 624 $ 558
Income before extraordinary loss.......................... $ 285 $ 248 $ 214 $ 198
Net income................................................ $ 285 $ 248 $ 214 $ 198
Income before extraordinary loss per common share(a):
Basic................................................... $ 0.44 $ 0.38 $ 0.32 $ 0.29
Diluted................................................. $ 0.40 $ 0.34 $ 0.29 $ 0.27
Weighted average shares outstanding(a):
Basic................................................... 641 653 663 675
Diluted................................................. 706 721 729 734
Stock sales prices per share(a):
High.................................................... $ 50 17/32 $ 51 15/16 $ 43 3/8 $ 23
Low..................................................... $ 35 $ 36 1/2 $ 22 1/8 $ 14 31/32
</TABLE>
37
<PAGE> 39
<TABLE>
<CAPTION>
FISCAL YEAR 1997
---------------------------------------------------
4TH 3RD 2ND 1ST
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenues......................................... $2,412 $2,019 $1,690 $1,638
Gross margin......................................... $ 524 $ 450 $ 373 $ 319
Income before extraordinary loss..................... $ 188 $ 149 $ 112 $ 82
Net income........................................... $ 188 $ 145 $ 103 $ 82
Income before extraordinary loss per common share(a):
Basic(b)........................................... $ 0.28 $ 0.22 $ 0.15 $ 0.11
Diluted(c)......................................... $ 0.25 $ 0.20 $ 0.14 $ 0.10
Weighted average shares outstanding(a):
Basic.............................................. 673 700 716 727
Diluted............................................ 744 763 783 783
Stock sales prices per share(a):
High............................................... $ 18 3/32 $ 11 3/32 $ 7 5/32 $ 5 27/32
Low................................................ $ 9 29/64 $ 6 33/64 $ 5 3/64 $ 3 5/16
</TABLE>
- ---------------
(a) Earnings per common share are computed independently for each of the
quarters presented. Therefore, the sum of the quarterly per common share
information may not equal the annual earnings per common share. All share,
per share and stock price information has been retroactively restated to
reflect the two-for-one split of the common stock in March 1998 and July
1997.
(b) Excludes extraordinary loss of $0.01 and $0.01 basic earnings per common
share for the third and second quarter, respectively, of fiscal 1997.
(c) Excludes extraordinary loss of $0.01 and $0.01 diluted earnings per common
share for the third and second quarter, respectively, of fiscal 1997.
NOTE 14 -- SUBSEQUENT EVENT
In March 1998, the Company filed a registration statement with the U.S.
Securities and Exchange Commission related to $500 million of debt securities.
Presently, no securities under this registration are issued or outstanding.
38
<PAGE> 40
PART III
ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
BOARD OF DIRECTORS
The Company's Board of Directors is separated into three classes, and the
directors in each class are elected to serve for three-year terms. The terms of
the Class I directors expire at the next annual meeting of stockholders
(currently scheduled for July 17, 1998), the terms of the Class II directors
expire at the annual meeting of stockholders to be held in 1999 and the terms of
the Class III directors expire at the annual meeting of stockholders to be held
in 2000. The following is a list of the persons who, as of April 1, 1998,
constituted the Company's Board of Directors and their ages, director class
designation and committee assignments as of that date.
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE CLASS COMMITTEES
---- --- -------- ----------
<S> <C> <C> <C>
Michael S. Dell........................ 33 II --
Donald J. Carty........................ 51 I Audit, Finance (Chairman), Nominating
Paul O. Hirschbiel, Jr................. 45 I Compensation, Finance
Michael H. Jordan...................... 61 II Compensation, Nominating (Chairman)
Thomas W. Luce III..................... 57 I Finance
Klaus S. Luft.......................... 56 II Audit, Finance
Claudine B. Malone..................... 61 III Audit (Chairman)
Alex J. Mandl.......................... 54 III Compensation
Michael A Miles........................ 58 III Compensation (Chairman), Nominating
</TABLE>
Set forth below is biographical information about each of the Company's
directors.
Michael S. Dell -- Mr. Dell has been Chairman of the Board, Chief Executive
Officer and a director of the Company since May 1984. Mr. Dell founded the
Company in 1984 while attending the University of Texas at Austin. He is a
member of the Board of Directors of the United States Chamber of Commerce and
the Computerworld/Smithsonian Awards. Mr. Dell serves on the nominating
committee for the National Technology Medal of Honor and is an advisor to the
Innovative Technology Management Association at the University of Texas at
Austin.
Donald J. Carty -- Mr. Carty has been a director of the Company since December
1992. Mr. Carty is President of American Airlines, Inc., a subsidiary of AMR
Corporation, and President of AMR Airline Group, positions he has held since
March 1995. He is also Executive Vice President of AMR Corporation. From October
1989 to March 1995, Mr. Carty held the positions of Chief Financial Officer of
AMR Corporation and Executive Vice President, Finance & Planning for AMR
Corporation and American Airlines, Inc. He has held senior vice presidential
positions with American Airlines, Inc. since 1988. Mr. Carty serves on the Board
of Trustees of Queen's University in Kingston, Ontario.
Paul O. Hirschbiel, Jr. -- Mr. Hirschbiel has been a director of the Company
since October 1987. Mr. Hirschbiel is a consultant with Cornerstone Equity
Investors, L.L.C., where he was Managing Director from December 1996 until
January 1998. Before then, Mr. Hirschbiel was a Vice President of Prudential
Equity Investors, Inc. and had held the position of Vice President or Director
with that firm since September 1983. Mr. Hirschbiel originally became a director
of the Company pursuant to the terms of a stock purchase agreement entered into
in connection with the issuance by the Company of a series of convertible
preferred stock in October 1987. Mr. Hirschbiel received a Bachelor of Arts
degree and a Masters of Business Administration degree from the University of
North Carolina at Chapel Hill.
Michael H. Jordan -- Mr. Jordan has been a director of the Company since
December 1992. Mr. Jordan is Chairman and Chief Executive Officer of CBS
Corporation (formerly Westinghouse Electric Corporation), positions he has held
since July 1993. Prior to joining Westinghouse, he was
39
<PAGE> 41
a principal with the investment firm of Clayton, Dubilier and Rice from
September 1992 through June 1993, Chairman of PepsiCo International from
December 1990 through July 1992 and Chairman of PepsiCo World-Wide Foods from
December 1986 to December 1990. Mr. Jordan is also a member of the boards of
directors of CBS Corporation and Aetna Inc.
Thomas W. Luce III -- Mr. Luce has been a director of the Company since November
1991. Mr. Luce is of counsel with the law firm Hughes & Luce, L.L.P., Dallas,
Texas, having co-founded the firm in 1973. From October 1991 through April 1992,
Mr. Luce was Chairman of the Board and Chief Executive Officer of First
Southwest Company, a Dallas-based investment firm that is a member of the
National Association of Securities Dealers, Inc.
Klaus S. Luft -- Mr. Luft has been a director of the Company since March 1995.
Mr. Luft is the founder, owner and President of MATCH -- Market Access for
Technology Services GmbH, a private company established in 1994 and
headquartered in Munich, Germany. MATCH provides sales and marketing services to
high technology companies. Since August 1990, Mr. Luft has served and continues
to serve as International Advisor to Goldman Sachs Europe Limited. From March
1986 to November 1989, Mr. Luft was Chief Executive Officer of Nixdorf Computer
AG, a manufacturer of computer systems in Paderborn, Germany, where he also held
various other executive positions for more than 17 years in marketing,
manufacturing and finance.
Claudine B. Malone -- Ms. Malone has been a director of the Company since
February 1993. Ms. Malone is President of Financial & Management Consulting,
Inc., a firm she founded in 1982. She has taught at the business schools of the
University of Virginia, Harvard University and Georgetown University. Ms. Malone
is a trustee of the Massachusetts Institute of Technology and the Chairman of
the Federal Reserve Bank of Richmond. She is also a member of the boards of
directors of Hannaford Brothers Co., Hasbro, Inc., Houghton Mifflin Corp.,
Lafarge Corp., The Limited, Inc., Lowe's Companies, Mallinckrodt Group Inc.,
SAIC and Union Pacific Corporation.
Alex J. Mandl -- Mr. Mandl has been a director of the Company since November
1997. Since August 1996, Mr. Mandl has been Chairman and Chief Executive Officer
of Teligent Inc., a telecommunications company that offers local, long distance,
Internet and other advanced communication services directly to business
customers. Before joining Teligent, Mr. Mandl was President and Chief Operating
Officer of AT&T, where he directed the long distance, wireless and local
communications services. During his tenure at AT&T, Mr. Mandl also held the
positions of Executive Vice President and Chief Executive Officer of the
Communication Services Group, Chief Financial Officer and Group Executive. Prior
to joining AT&T in 1991, Mr. Mandl was Chairman and Chief Executive Officer of
Sea-Land Services, Inc., the world's largest ocean transportation company. Mr.
Mandl is also a member of the boards of directors of Warner-Lambert Company,
Forstmann Little & Co. and General Instruments Corporation.
Michael A. Miles -- Mr. Miles has been a director of the Company since February
1995. He is the former Chairman of the Board and Chief Executive Officer of
Philip Morris Companies Inc., having served in that position from September 1991
to July 1994. Prior to assuming that position, Mr. Miles was Vice Chairman and a
member of the Board of Directors of Philip Morris Companies Inc. and Chairman
and Chief Executive Officer of Kraft General Foods, Inc., positions he held from
December 1989. Mr. Miles is also a Special Limited Partner in the investment
firm of Forstmann Little & Co. and is the non-executive chairman of Community
Health Systems, a hospital management company owned by Forstmann Little & Co. He
is also a member of the boards of directors of Dean Witter Discover & Co.,
Sears, Roebuck and Co., Time Warner Inc. and Allstate, Inc. and is a trustee of
Northwestern University.
40
<PAGE> 42
EXECUTIVE OFFICERS
The following table sets forth the name, age and position of each of the persons
who were serving as executive officers of the Company as of April 1, 1998.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Michael S. Dell............................ 33 Chairman of the Board, Chief Executive
Officer and Director
Morton L. Topfer........................... 61 Vice Chairman
Kevin B. Rollins........................... 45 Vice Chairman
Paul D. Bell............................... 37 Vice President, Americas Home and Small
Business Group
G. Carl Everett, Jr........................ 47 Senior Vice President, Desktop and
Workstations
Jan Gesmar-Larsen.......................... 37 Senior Vice President and President -
Europe, Middle East and Africa
Thomas B. Green............................ 43 Senior Vice President, Law and
Administration and Secretary
Jerome N. Gregoire......................... 46 Vice President and Chief Information
Officer
Phillip E. Kelly........................... 40 Vice President and President - Asia Pacific
Group
Michael D. Lambert......................... 51 Senior Vice President, Server Group
Douglas B. MacGregor....................... 45 Vice President, Notebook Business Unit
Joseph A. Marengi.......................... 44 Senior Vice President, Americas
Relationship Group
Thomas J. Meredith......................... 47 Senior Vice President and Chief Financial
Officer
Rosendo G. Parra........................... 38 Vice President and General Manager -
Americas Public and International Group
Charles H. Saunders........................ 54 Vice President and President - Dell Japan
James M. Schneider......................... 45 Vice President of Finance
Alex C. Smith.............................. 38 Vice President, Treasurer
</TABLE>
Set forth below is biographical information about each of the Company's
executive officers, except for Mr. Dell, whose biographical information is
included under "Board of Directors" above.
Morton L. Topfer -- Mr. Topfer has been Vice Chairman of the Company since June
1994. In this position, Mr. Topfer shares the Office of the Chief Executive
Officer with Mr. Dell and Mr. Rollins. For 23 years prior to joining the
Company, Mr. Topfer held various positions with Motorola, Inc., last serving as
Corporate Executive Vice President and President of the Land Mobile Products
Sector. Before joining Motorola in 1971, Mr. Topfer spent 11 years with RCA
Laboratories in various research and development and management positions. He
began his professional career as a research engineer with Kollsman Instruments
Corporation in New York. Mr. Topfer received a Bachelor of Science degree in
Physics from Brooklyn College and a Master of Science degree in Physics from the
Polytechnic Institute of Brooklyn. He is a member of the board of directors of
Autodesk, Inc. and Alliance Gaming.
Kevin B. Rollins -- Mr. Rollins has been Vice Chairman of the Company since
November 1997 and, in this position, shares the Office of the Chief Executive
Officer with Mr. Dell and Mr. Topfer. Mr. Rollins joined the Company in April
1996 as Senior Vice President, Corporate Strategy and was named Senior Vice
President, General Manager - Americas in May 1996. For 12 years prior to joining
the Company, Mr. Rollins was employed by Bain & Company, an international
strategy consulting firm, most recently serving as a director and partner. Mr.
Rollins received a Master of Business Administration degree and a Bachelor of
Arts degree from Brigham Young University.
41
<PAGE> 43
Paul D. Bell -- Mr. Bell joined the Company in June 1996 and serves as Vice
President, Americas Home and Small Business Group, where he is responsible for
managing all sales, marketing and customer service activities of the group and
also for sales and marketing for the Company's Dimension product line. Prior to
joining the Company, Mr. Bell was with Bain & Company, where he was a management
consultant for six years, including two years as a consultant for the Company.
Mr. Bell received a bachelor's degree in Fine Arts and Business Administration
from Pennsylvania State University and a master's degree in Public and Private
Management from the Yale School of Organization and Management.
G. Carl Everett, Jr. -- Mr. Everett joined the Company in February 1998 as
Senior Vice President, Desktops and Workstations. In that position, he is
responsible for worldwide development and marketing of the Company's OptiPlex
and Dimension lines of desktop computer systems and the Company's WorkStation
400 line. For over 18 years prior to joining the Company, Mr. Everett was
employed by Intel Corporation, where he began in a field sales office and
advanced into sales and marketing management. He was appointed vice president in
1989 and, until 1994, oversaw North American and then worldwide sales. From 1994
to 1996, Mr. Everett served as Senior Vice President and General Manager of the
Desktop Products Group. Prior to joining Intel in 1978, Mr. Everett held various
sales, marketing and customer support positions with Motorola Semiconductor
Products Group. Mr. Everett holds a Bachelor of Business Administration degree
in Management from New Mexico State University.
Jan Gesmar-Larsen -- Mr. Gesmar-Larsen joined the Company in August 1997 as
Senior Vice President and President - Europe, Middle East and Africa. Prior to
joining the Company, Mr. Gesmar-Larsen held various positions with Apple
Computer Europe, including Business Unit Director, Education Channels; Sales
Director, Core Business; Managing Director, Central Europe; and finally
President, Europe. Prior to joining Apple in 1992, Mr. Gesmar-Larsen was manager
of the Systems Division of Compaq Corporation, Europe and International. Prior
to that, he held various management positions at Olivetti Corporation. Mr.
Gesmar-Larsen holds a bachelors degree in economics and a masters degree in
marketing.
Thomas B. Green -- Mr. Green has been Senior Vice President, Law and
Administration since November 1997 and, in that position, is responsible for
overseeing the Company's legal and governmental affairs, human resources
function and other administrative departments. Mr. Green joined the Company in
August 1994 as General Counsel and Secretary. Before joining the Company, Mr.
Green served as Executive Vice President and General Counsel of Chicago Title &
Trust Company, where he was employed from October 1992 to July 1994, and as
Executive Vice President and General Counsel of Trammell Crow Company from
October 1990 to October 1992. From February 1989 to October 1990, Mr. Green was
employed by the law firm of Jones, Day, Reavis & Pogue, Dallas, Texas, last
serving as a partner in that firm. His background also includes a term as law
clerk to former United States Supreme Court Chief Justice Warren Burger. Mr.
Green received a Bachelor of Arts degree in English and a Juris Doctor degree
from the University of Utah.
Jerome N. Gregoire -- Mr. Gregoire joined the Company in July 1996 as Vice
President and Chief Information Officer. In this position, Mr. Gregoire is
responsible for the Company's worldwide information systems, including an
ongoing program to further develop state-of-the-art information systems and
processes. For 10 years prior to joining the Company, Mr. Gregoire held various
positions with PepsiCo, Inc., most recently serving as Vice President of
Information Systems for Pepsi-Cola Company, the beverage division of the PepsiCo
family. While at PepsiCo, Mr. Gregoire also served as Vice President of
Management Information Systems for PepsiCo Food Systems, supporting the
worldwide Kentucky Fried Chicken, Pizza Hut and Taco Bell operations. Mr.
Gregoire's previous experience also includes positions as Vice President of the
systems group for Dean Research Corporation, a Kansas City-based specialist in
computer-controlled materials handling, primarily to the aerospace industry; and
as Vice President of Information Systems for Kraft/CDC Foodservice, also based
in Kansas City.
42
<PAGE> 44
Phillip E. Kelly -- Mr. Kelly joined the Company in November 1994 as Vice
President, General Manager - Asia Pacific. In August 1997, Mr. Kelly was awarded
the title of President - Asia Pacific. For 14 years prior to joining the
Company, Mr. Kelly held various positions with Motorola, Inc., last serving as
Vice President and General Manager for the North Asian Division of the Land
Mobile Products Sector, based in Hong Kong. Mr. Kelly received a Bachelor of
Business Administration degree from the University of San Diego. He is a member
of the Asia-Pacific Executive Forum and the Hong Kong American Chamber of
Commerce.
Michael D. Lambert -- Mr. Lambert joined the Company in October 1996 as Senior
Vice President, Server Group. In this position, Mr. Lambert is responsible for
further developing for the Company a worldwide server business. Prior to joining
the Company, Mr. Lambert held various officer positions with Compaq Computer
Corporation, last serving as Vice President of North American Marketing. Prior
to joining Compaq in 1994, Mr. Lambert served four years as general manager of
the large computer products division for NCR Corporation. Mr. Lambert's more
than 28 years' experience in the computer systems industry also includes senior
positions with Arix Corporation in San Jose, California, a manufacturer of
multiprocessor UNIX-based systems, and Convergent Technologies, also in San
Jose, California. Mr. Lambert received a bachelor's degree in business
administration from the University of Kentucky in Lexington.
Douglas B. MacGregor -- Mr. MacGregor has been with the Company since December
1993, first serving in positions responsible for overseeing the development,
marketing and program management for the Company's entire line of desktop
computer systems; then functioning as the vice president of the Company's
Dimension product line; then serving as Vice President, Worldwide Procurement.
In February 1997, Mr. MacGregor was named Vice President, Notebook Business
Unit. Prior to joining the Company, Mr. MacGregor served as division vice
president for AViiON development at Data General Corporation. Prior to joining
Data General, Mr. MacGregor founded Solbourne Computer, Inc., where he developed
the industry's first SPARC-compatible workstations and the first SPARC
multiprocessor products. He also spent five years as a microprocessor designer
at Motorola, Inc. Mr. MacGregor earned a bachelor's degree from the University
of Maryland, a Master of Science degree in Computer Science from the University
of Illinois and a doctorate degree in Information Science from Kyoto University
in Japan.
Joseph A. Marengi -- Mr. Marengi joined the Company in July 1997 as Senior Vice
President, Americas Relationship Group. In this position, Mr. Marengi is
responsible for the Americas units serving enterprise, large corporate and
medium business customers. Prior to joining the Company, Mr. Marengi worked with
Novell, Inc., most recently serving as President and Chief Operating Officer. He
joined Novell in 1989, beginning as director of the Eastern region and moving
through successive promotions to become executive vice president of worldwide
sales and field operations, responsible for setting up the major account,
licensing and consulting programs and overseeing Novell's international
expansion. For ten years prior to joining Novell, Mr. Marengi served as vice
president of channel sales for Excelan, Inc. and in various other executive,
sales, information management and production automation positions. From 1978
through 1981, Mr. Marengi served in the United States Coast Guard and Coast
Guard Reserve, reaching the rank of Lieutenant Commander. Mr. Marengi earned a
bachelor's degree in public administration from the University of Massachusetts
and a master's degree in management from the University of Southern California.
Thomas J. Meredith -- Mr. Meredith joined the Company in November 1992 as Chief
Financial Officer. In September 1995, Mr. Meredith was named Senior Vice
President, Finance and Information Systems and retained the position of Chief
Financial Officer. In July 1996, Mr. Meredith's title was changed to Senior Vice
President and Chief Financial Officer. Prior to joining the Company, Mr.
Meredith was Vice President and Treasurer of Sun Microsystems, Inc. from April
1990 to November 1992 and held various financial positions with Amdahl
Corporation before that time, last serving as President of Amdahl Capital
Corporation. His background also includes the positions of Director of Tax
Research and Planning for Castle and Cooke, Inc. and Senior Tax Consultant for
Arthur Young & Company. Mr. Meredith received a Bachelor of Science degree in
political science
43
<PAGE> 45
from St. Francis College in Loretto, Pennsylvania, a Juris Doctor degree from
Duquesne University and a Master of Law degree in Taxation from Georgetown
University. Mr. Meredith is a member of the boards of directors of i2
Technologies, Inc. and I-Cube, Inc.
Rosendo G. Parra -- Mr. Parra joined the Company in August 1993 and serves as
Vice President and General Manager - Americas Public and International Group. In
that position, Mr. Parra is responsible for the Company's operations in the
federal, state and local government and educational market segments, as well as
Canada, Mexico and South America. Prior to joining the Company, Mr. Parra held
various sales and general management positions with GRiD systems Corporation,
including regional sales director and vice president and general manager of the
PC strategic business unit. Before his association with GRiD, Mr. Parra spent
nine years serving in various sales and management positions for the business
products division of Tandy Corporation. Mr. Parra earned a bachelor's degree in
Marketing from the University of Maryland.
Charles H. Saunders -- Mr. Saunders joined the Company in May 1997 as Vice
President and President - Japan and is responsible for all operations of Dell's
Japanese subsidiary. Prior to joining the Company, Mr. Saunders spent 25 years
at Motorola, Inc., most recently holding the position of Corporate Vice
President and General Manager of the US/Canada Division of the Land Mobile
Products Sector. Before then, he served as Managing Director and Corporate Vice
President and General Manager of the Land Mobile Products Division of Nippon
Motorola Ltd. During his tenure in Japan, Mr. Saunders also held the position of
managing director of the Japan Mobile Telecommunications Association. Mr.
Saunders is a graduate of East Tennessee State University.
James M. Schneider -- Mr. Schneider joined the Company in October 1996 as Vice
President of Finance and also serves as the Company's Chief Accounting Officer.
In this position, Mr. Schneider is responsible for planning, management
reporting and related systems, risk management and worldwide financial controls.
For three years prior to joining the Company, Mr. Schneider was with MCI
Communications Corporation, last serving as Senior Vice President of Corporate
Finance. For 19 years prior to joining MCI, Mr. Schneider was associated with
Price Waterhouse LLP, serving as a partner for 10 years. Mr. Schneider earned a
bachelor's degree in accounting from Carroll College in Waukesha, Wisconsin, and
is a Certified Public Accountant. He is a member of the board of directors of
General Communications, Inc.
Alex C. Smith -- Mr. Smith has been employed by the Company since April 1991,
serving as Finance Manager from April 1991 to November 1993 and Director of
Treasury Operations from November 1993 to November 1995, when he was named Vice
President, Treasurer. Prior to joining the Company, Mr. Smith held various
treasury management positions with Electronic Data Systems Corporation and
Commodore International Ltd. Mr. Smith received a Bachelor of Science and
Business Administration degree in Economics from the University of Florida and a
Master of International Management degree in Finance from the American Graduate
School of International Management.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Claudine B. Malone, a non-employee director of the Company, failed to report on
her Form 4 for the month of September 1997 a sale of 28,800 (prior to the March
1998 split) shares of the Company's common stock that occurred on September 5,
1997. This failure was inadvertent, and the transaction has now been reported on
Ms. Malone's Form 5 filed with respect to fiscal 1998. This was the only
transaction that was not timely reported.
44
<PAGE> 46
ITEM 11 -- EXECUTIVE COMPENSATION
All common stock information has been adjusted to take into account the
two-for-one split of the common stock paid in July 1997 and the two-for-one
split of the common stock paid in March 1998.
COMPENSATION OF DIRECTORS
The following is a description of the compensation arrangements for the
Company's non-employee directors. The compensation arrangements for the
non-employee directors are based on a "Service Year," which is the annual period
commencing at an annual meeting of the Company's stockholders and ending at the
next annual meeting of stockholders. Mr. Dell, who is the only director who is
also an employee of the Company, does not receive any additional compensation
for serving on the Board of Directors.
Annual Cash Payments -- Currently, each non-employee director (other than Mr.
Mandl) receives an annual retainer fee of $30,000 and an additional $1,000 for
each Board of Directors meeting attended in person. In November 1997, the Board
of Directors changed its non-employee director compensation arrangement,
increasing the annual retainer fee to $40,000 and eliminating the $1,000 meeting
fees. Any new non-employee director whose term begins during a Service Year will
be entitled to the full amount of the annual retainer fee if 50% or more of the
scheduled Board of Directors meetings for that Service Year are scheduled to
occur after the director's election; otherwise, the new non-employee director is
entitled to receive 50% of the annual retainer fee for that Service Year. The
annual retainer fee for a Service Year is payable at the first Board of
Directors meeting during the Service Year. For all non-employee directors other
than Mr. Mandl, this new arrangement will be effective for the Service Year that
begins in 1998 and for subsequent Service Years. Mr. Mandl, who was appointed to
the Board of Directors in November 1997, at the same time that the new
compensation arrangement was approved, is currently being compensated based on
the new arrangement.
The Company maintains a deferred compensation plan for the non-employee
directors, pursuant to which the directors may elect to defer all or a portion
of their annual retainer fees. A director's deferred amounts are allocated by
the director to various investment funds and, along with any earnings, are
payable to the director upon termination of service as a member of the Board of
Directors or to the director's named beneficiary in the event of death.
Distribution of the deferred amounts and any earnings may be made, at the
election of the participating director, in a lump sum or in annual, quarterly or
monthly installments over a period of up to ten years.
A non-employee director may elect to receive an option to purchase the Company's
common stock in lieu of all or a portion of the annual retainer fee. The option
is granted on the date the annual retainer fee would otherwise have been paid.
The number of shares subject to the option is determined by dividing the amount
of the annual retainer fee subject to the election by the value of an option for
one share of common stock (calculated pursuant to the Black-Scholes model). The
exercise price of the option is the average of the high and low reported sales
price of the Company's common stock on the date of grant. The option vests and
becomes exercisable with respect to 20% of the shares on each of the first five
anniversaries of the date of grant and terminates on the tenth anniversary of
the date of grant.
Option Awards -- As noted above, the Board of Directors changed its non-employee
director compensation arrangements in November 1997. Prior to that change,
non-employee directors were entitled to receive an initial option award covering
a specified number of shares of the Company's common stock upon election to the
Board of Directors and an annual option award covering a specified number of
shares for each year of service. The Company's Incentive Plan, which was
approved by the stockholders in June 1994 and which specified the compensation
arrangements for non-employee directors, originally provided that the
non-employee directors' initial option award was to cover 15,000 shares of
common stock and that each annual award was to cover 6,000 shares. The Incentive
Plan also provided, however, that those numbers were to be adjusted to take
45
<PAGE> 47
stock splits into account. As a result of adjustments for the two-for-one split
of the common stock paid in October 1995 and the two-for-one split of the common
stock paid in December 1996, the size of the initial and annual option awards
had grown to 60,000 shares and 24,000 shares, respectively. After the
announcement of an additional two-for-one split of the common stock in May 1997
(to be paid in July 1997), the Board of Directors decided to review the
Company's non-employee director compensation arrangement and, pending completion
of that review, unanimously elected to forego the adjustment in their annual
option awards for the July 1997 stock split. Consequently, each non-employee
director who was serving immediately after the stockholders' meeting in 1997
received an annual option award covering 24,000 shares (rather than 48,000,
which would have been the award had the split adjustment been made).
In November 1997, after completing a thorough review and analysis of
non-employee director compensation plans at various companies deemed comparable
for this purpose, the Board of Directors unanimously determined that it was in
the best interests of the Company and its stockholders to modify the terms of
the compensation paid to non-employee directors, including the size of the
automatic option awards, and adopted new non-employee director compensation
arrangements. Under the new arrangements, the number of shares of common stock
subject to each annual option award for a Service Year will be equal to the
"Annual Award Base Number" for that Service Year divided by the fair market
value of the common stock on the date of grant. The number of shares subject to
an initial option award for a new non-employee director will be equal to the
"Initial Award Base Number" divided by the fair market value of the common stock
on the date of grant, and the first annual option award for a new non-employee
director will be prorated on the same basis as the director's annual retainer
fee, as described above. The Annual Award Base Number will be $650,000 (subject
to an annual escalation factor of 10%), and the Initial Award Base Number at any
given time will be 300% of the then-applicable Annual Award Base Number. The
annual option awards for each Service Year are to be granted as of the first day
of that Service Year, and an initial option award is to be granted to a new
non-employee director as of the date of the first Board of Directors meeting
attended. Under the new arrangements, the method of computing the number of
shares subject to the initial and annual option awards will not be adjusted to
take into account future stock splits (including the two-for-one split of the
common stock paid in March 1998); however, once an option has been issued, the
number of shares subject to the option and the exercise price of the option will
be adjusted to take into account any subsequent stock splits.
As a result of these new non-employee director compensation arrangements, each
of the Company's current non-employee directors will receive, effective as of
the date of the upcoming annual meeting of stockholders (which is scheduled for
July 17, 1998), an annual option award covering a number of shares equal to
$650,000 divided by the fair market value of the common stock on the date of
grant. It is not possible to compute the size of the award at the present time;
however, if the number were computed on the basis of the fair market value of
the common stock as of March 31, 1998, the size of the award would be
approximately 9,600 shares, which is substantially smaller than it would have
been (96,000 shares) had the non-employee director compensation arrangements not
been changed.
In the case of both initial awards and annual awards, the exercise price of the
option is equal to the "fair market value" of the common stock on the date of
grant, which is defined as the average of the high and low reported sales price
of the common stock on that date. The option vests and becomes exercisable with
respect to 20% of the shares on each of the first five anniversaries of the date
of grant, so long as the director remains a member of the Board of Directors
through those dates. The option terminates when the director ceases to be a
member of the Board of Directors (if the Board of Directors demands or requests
the director's resignation), 90 days after the director ceases to be a member of
the Board of Directors (if the director resigns for any other reason) or one
year after the director ceases to be a member of the Board of Directors because
of death or permanent disability. In any event, the option terminates on the
tenth anniversary of the date of grant.
46
<PAGE> 48
Because Mr. Mandl was appointed to the Board of Directors at the time that the
new compensation arrangement was approved, his compensation is based on the new
arrangement. Consequently, effective November 21, 1997, the date of the first
Board of Directors meeting that Mr. Mandl attended, Mr. Mandl received an option
covering 61,356 shares of common stock, 46,017 were attributable to his initial
award and 15,339 were attributable to the annual award for the Service Year that
commenced in 1997. Had the Board of Directors not changed the non-employee
director compensation arrangement, Mr. Mandl would have received an option
covering 240,000 shares.
Other Benefits -- The Company reimburses non-employee directors for their
reasonable expenses associated with attending Board of Directors meetings and
provides the directors with liability insurance coverage with respect to their
activities as directors of the Company.
Compensation During Fiscal 1998 -- The following table describes the fiscal 1998
fees and stock option grants for each of the Company's non-employee directors.
<TABLE>
<CAPTION>
CASH
NAME PAYMENTS OPTIONS GRANTED(A)
---- -------- ------------------
<S> <C> <C>
Mr. Carty............................................ $35,000(b) 48,000 shares
Mr. Hirschbiel....................................... $34,000 48,000 shares
Mr. Jordan........................................... $34,000(b) 48,000 shares
Mr. Luce(c).......................................... $ 5,000 49,722 shares
Mr. Luft............................................. $35,000 48,000 shares
Ms. Malone........................................... $35,000 48,000 shares
Mr. Mandl(d)......................................... $40,000 61,356 shares
Mr. Miles(c)......................................... $ 5,000 49,722 shares
</TABLE>
- ---------------
(a) Effective July 18, 1997 (the date of the first Board of Directors meeting
following last year's annual meeting of stockholders), each non-employee
director received an option to purchase 24,000 shares with an exercise
price of $74.08 per share, which upon payment of the two-for-one split of
the common stock on March 6, 1998, is now the equivalent of an option to
purchase 48,000 shares at an exercise price of $37.04 per share.
(b) Elected to defer $30,000 of this amount pursuant to the deferred
compensation plan described above.
(c) Mr. Luce and Mr. Miles elected to receive options in lieu of the $30,000
annual retainer fee. Accordingly, in addition to the options referred to in
note (a) above, on July 18, 1997 (the date of the first Board of Directors
meeting following last year's annual meeting of stockholders), each of Mr.
Luce and Mr. Miles received an option to purchase 861 shares with an
exercise price of $74.08 per share, which as a result of the March 1998
stock split, is now the equivalent of an option to purchase 1,722 shares at
an exercise price of $37.04.
(d) Mr. Mandl's compensation reflects the new non-employee director
compensation arrangements approved by the Board of Directors in November
1997.
COMPENSATION OF EXECUTIVE OFFICERS
General -- The compensation paid to the Company's executive officers is
administered by the Compensation Committee of the Board of Directors and
consists of base salaries, annual bonuses, awards made pursuant to the Incentive
Plan, contributions to the Company-sponsored 401(k) retirement plan and deferred
compensation plan and miscellaneous benefits. The following table summarizes the
total compensation for each of the last three fiscal years awarded to, earned by
or paid to the Company's Chief Executive Officer and the four most highly
compensated executive officers of the Company (other than the Chief Executive
Officer) who were serving as executive officers at the end of fiscal 1998 (the
"Named Executive Officers").
47
<PAGE> 49
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
---------------------------------- -----------------------
OTHER SHARES ALL OTHER
ANNUAL RESTRICTED UNDER- OTHER
NAME AND FISCAL COMPEN- STOCK LYING COMPEN-
PRINCIPAL POSITION YEAR SALARY BONUS SATION(A) AWARDS(B) OPTIONS(C) SATION(D)
------------------ ------ -------- ---------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
MICHAEL S. DELL................ 1998 $788,462 $2,000,000 $ 1,650 $ 0 3,200,000 $10,759
Chairman of the Board, 1997 688,461 1,304,910 17,440 0 3,200,000 36,266
Chief Executive Officer 1996 568,629 731,421 92,541 0 480,000 22,044
MORTON L. TOPFER............... 1998 616,346 2,000,000(e) 7,749 0 150,000 17,568
Vice Chairman 1997 544,276 1,031,622 17,567 0 360,000 36,636
1996 490,892 631,429 116,515 640,000 2,200,000 27,652
KEVIN B. ROLLINS............... 1998 450,381 1,125,953(e) 141,206 0 400,000 12,633
Vice Chairman 1997 341,540 486,610 125,099 0 2,680,000 3,000
1996 -- -- -- -- -- --
THOMAS J. MEREDITH............. 1998 408,288 1,020,719(e) 825 0 80,000 10,826
Senior Vice President, 1997 383,547 545,232 14,314 0 240,000 19,037
Chief Financial Officer 1996 327,635 316,075 41,534 320,000 224,000 16,621
PHILLIP E. KELLY............... 1998 308,892 579,173(e) 405,538 0 60,000 10,323
Vice President and 1997 266,923 379,358 422,616 0 220,776 10,117
President -- Asia Pacific 1996 223,397 166,243 288,275 731,200 400,000 11,107
</TABLE>
- ---------------
(a) The amounts shown in this column include amounts paid by the Company for
personal financial counseling and tax planning services and (prior to
fiscal 1997) reimbursement for the related tax liability (Mr. Dell, $1,650
in fiscal 1998, $17,440 in fiscal 1997 and $92,541 in fiscal 1996; Mr.
Topfer, $5,008 in fiscal 1998, $17,567 in fiscal 1997 and $34,031 in fiscal
1996; Mr. Rollins, $12,390 in fiscal 1998 and $643 in fiscal 1997; Mr.
Meredith, $825 in fiscal 1998, $14,314 in fiscal 1997 and $39,485 in fiscal
1996; and Mr. Kelly, $3,350 in fiscal 1998 and $5,693 in fiscal 1997) and
relocation expenses paid by the Company and reimbursement for the related
tax liability (Mr. Topfer, $2,741 in fiscal 1998 and $82,484 in fiscal
1996; and Mr. Rollins, $128,816 in fiscal 1998 and $34,456 in fiscal 1997).
For Mr. Rollins, the amount shown for fiscal 1997 also includes the amount
of bonus paid on commencement of employment ($90,000). For Mr. Meredith,
the amount shown for fiscal 1996 also includes imputed interest on
below-market loans that have since been repaid ($2,049). For Mr. Kelly, the
amounts shown also include expat allowances ($335,406 in fiscal 1998,
$365,709 in fiscal 1997 and $245,948 in fiscal 1996) and reimbursement for
miscellaneous goods and services ($66,782 in fiscal 1998, $51,214 in fiscal
1997 and $42,327 in fiscal 1996).
(b) For Mr. Topfer, the amount shown represents the value of 160,000 shares of
the Company's common stock awarded on July 24, 1995 (calculated using the
closing sales price of the common stock on the date of grant, which was
$4.00). The shares are subject to vesting and transfer restrictions that
will lapse with respect to all of the shares on the fourth anniversary of
the date of grant. In addition, the shares are subject to forfeiture (and
any gain realized on the sale of the shares is subject to repayment to the
Company) if Mr. Topfer competes with the Company within two years after his
employment with the Company is terminated.
For Mr. Meredith, the amount shown represents the value of 80,000 shares of
the Company's common stock awarded on July 24, 1995 (calculated using the
closing sales price of the common stock on the date of grant, which was
$4.00). The shares are subject to vesting and transfer restrictions that
will lapse with respect to one-seventh of the shares on each of the first
seven anniversaries of the date of grant. In addition, the shares are
subject to forfeiture (and any gain realized on the sale of the shares is
subject to repayment to the Company) if Mr. Meredith competes with the
Company within two years after his employment with the Company is
terminated.
For Mr. Kelly, the amount shown represents the value of 160,000 shares of
the Company's common stock awarded on February 7, 1995 (calculated using
the closing sales price of the common stock on the date of grant, which was
$2.57) and the value of 80,000 shares of the Company's common stock awarded
on July 24, 1995 (calculated using the closing sales price of the common
stock on the date of grant, which was $4.00). With respect to each award,
the shares are subject to vesting and transfer restrictions that will lapse
with respect to one-seventh of the shares on each of the first seven
anniversaries of the date of grant. In addition, the shares are subject to
forfeiture (and any gain realized on the sale of the shares is subject to
repayment to the Company) if Mr. Kelly competes with the Company within two
years after his employment with the Company is terminated.
48
<PAGE> 50
The total number and value of the shares of restricted stock held by the
Named Executive Officers as of the end of fiscal 1998 are as follows, with
the values based on the closing sales price of the Company's common stock on
the last trading day of fiscal 1998 ($49.72):
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
--------- ----------
<S> <C> <C>
Mr. Dell.................................................... 0 $ 0
Mr. Topfer.................................................. 160,000 7,955,040
Mr. Rollins................................................. 0 0
Mr. Meredith................................................ 57,120 2,839,949
Mr. Kelly................................................... 194,160 9,653,441
</TABLE>
When and if the Board of Directors declares and pays dividends on the
Company's common stock, such dividends will be paid on the outstanding
shares of restricted stock described in this note at the same rate as they
are paid to all stockholders.
(c) Does not include options granted under the Executive Stock Ownership
Incentive Program described below (the "ESOIP"), pursuant to which a Named
Executive Officer may elect to receive discounted stock options in lieu of
all or a portion of annual bonus. See note (e) below for information
regarding ESOIP elections made for fiscal 1998 annual bonuses. For
information regarding the stock option grants made during fiscal 1998
(including information with respect to options granted pursuant to ESOIP
elections made for fiscal 1997 annual bonuses), see the table titled "Option
Grants in Last Fiscal Year" under "Item 11 -- Executive
Compensation -- Compensation of Executive Officers -- Incentive Plan Awards"
below.
(d) Includes the value of the Company's contributions to the Company-sponsored
401(k) retirement savings plan that is available to all Company employees,
the amount of the Company's contributions to the deferred compensation plan
that is available to certain members of the Company's management and the
amount paid by the Company for term life insurance coverage under health and
welfare plans available to all Company employees.
(e) In accordance with the terms of the ESOIP, Mr. Topfer, Mr. Rollins and Mr.
Meredith each elected to receive discounted stock options in lieu of 100% of
his annual bonus, and Mr. Kelly elected to receive discounted stock options
in lieu of 30% of his annual bonus. The amount shown represents the amount
of the annual bonus awarded, whether paid or foregone in lieu of discounted
options. In lieu of the foregone amounts, those persons received options
covering the following number of shares: Mr. Topfer, 157,016; Mr. Rollins,
88,396; Mr. Meredith, 80,134; and Mr. Kelly, 13,640. The options were
granted on March 20, 1998 and have an exercise price of $50.95 (which was
80% of the market value of the common stock on that date). These options are
subject to a one-year vesting period and, accordingly, do not vest and are
not exercisable until the first anniversary of the date of grant.
Incentive Plan Awards -- The Company's Incentive Plan provides for the granting
of incentive awards in the form of stock options, stock appreciation rights,
stock and cash to directors, executive officers and key employees of the Company
and its subsidiaries and certain other persons who provide consulting or
advisory services to the Company. Pursuant to an amendment to the Incentive Plan
that was approved by the stockholders at last year's annual meeting, the number
of shares of the Company's common stock that may be issued pursuant to awards
under the Incentive Plan is automatically increased at the beginning of each
fiscal year, beginning with fiscal 1999 and ending with fiscal 2003. The number
of additional shares that will be available for awards at the beginning of any
such fiscal year will be equal to 4% of the following amount: the total number
of issued and outstanding shares of common stock as of the end of the
immediately preceding fiscal year, plus the total number of shares of common
stock repurchased by the Company during the immediately preceding fiscal year
under the Company's stock repurchase program. That percentage will be increased
to 5% if the total shareholder return (consisting of increase in stock price
plus dividends paid) achieved by the Company during the immediately preceding
fiscal year exceeds the average total shareholder return achieved by the
companies included in the S&P Computer Systems Index during the immediately
preceding fiscal year. As of the beginning of fiscal 1999, an aggregate of
162,701,660 shares of common stock were authorized for issuance pursuant to
awards under the Incentive Plan (including 35,654,140 shares that were added at
the beginning of fiscal 1999 under the formula described above) and 45,728,576
shares remained available for issuance under Incentive Plan awards.
49
<PAGE> 51
No restricted stock was awarded to any of the Named Executive Officers during
fiscal 1998. The following table sets forth information about stock option
grants made to the Named Executive Officers during fiscal 1998. The Company has
not made any awards of stock appreciation rights to any of the Named Executive
Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------------------------
NUMBER PERCENTAGE OF
OF SHARES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE GRANT DATE
OPTIONS EMPLOYEES IN PRICE GRANT EXPIRATION PRESENT
NAME GRANTED(A) FISCAL YEAR PER SHARE DATE DATE VALUE(B)
---- ---------- ------------- --------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Mr. Dell............. 2,000,000 9.16% $ 18.531 3-5-97 3-5-07 $31,244,700
1,200,000 5.49 37.040 7-18-97 7-18-07 35,784,810
Mr. Topfer........... 309,388(c) 1.42 13.338 3-21-97 3-21-07 6,294,746
150,000 0.69 37.040 7-18-97 7-18-07 4,473,101
Mr. Rollins.......... 100,000 0.46 37.040 7-18-97 7-18-07 2,982,068
300,000 1.37 40.625 12-22-97 12-22-07 10,020,015
Mr. Meredith......... 163,516(c) 0.75 13.338 3-21-97 3-21-07 3,326,864
80,000 0.37 37.040 7-18-97 7-18-07 2,385,654
Mr. Kelly............ 45,516(c) 0.21 13.338 3-21-97 3-21-07 926,059
60,000 0.27 37.040 7-18-97 7-18-07 1,789,241
</TABLE>
- ---------------
(a) Unless otherwise noted, these options will vest and become exercisable with
respect to one-fifth of the underlying shares on each of the first five
anniversaries of the date of grant.
(b) Calculated using the Black-Scholes model. The material assumptions and
adjustments incorporated into the Black-Scholes model in making such
calculations include the following: (1) an interest rate representing the
interest rate on U.S. Treasury securities with a maturity date
corresponding to the option term; (2) volatility determined using daily
prices for the Company's common stock during the five-year period
immediately preceding date of grant; (3) a dividend rate of $0; and (4) in
each case (other than the ESOIP options described in note (c) below), a
reduction of 25% to reflect the probability of forfeiture due to
termination of employment prior to vesting and the probability of a
shortened option term due to termination of employment prior to the option
expiration date. The ultimate values of the options will depend on the
future market prices of the common stock, which cannot be forecast with
reasonable accuracy. The actual value, if any, that an optionee will
recognize upon exercise of an option will depend on the difference between
the market value of the common stock on the date the option is exercised
and the applicable exercise price.
(c) These options were granted as a part of the ESOIP, which is described
below. These options were fully vested when granted but were not
exercisable until the first anniversary of the date of grant. These options
were received in lieu of fiscal 1997 annual bonuses in the following
amounts: Mr. Topfer, $1,031,622 (100%); Mr. Meredith, $545,232 (100%); and
Mr. Kelly, $151,682 (40%). Those amounts are shown in the Bonus column of
the "Summary Compensation Table" above.
50
<PAGE> 52
The following table sets forth, for each Named Executive Officer, information
concerning the exercise of stock options during fiscal 1998 and the value of
unexercised stock options at the end of fiscal 1998.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END(B)
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED(A) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mr. Dell............. 0 $ 0 832,000 6,048,000 $36,214,480 $200,467,820
Mr. Topfer........... 1,241,000 37,519,304 0 3,698,388 0 163,012,986
Mr. Rollins.......... 408,000 13,921,321 128,000 2,544,000 5,786,558 102,532,852
Mr. Meredith......... 620,000 19,910,401 472,670 1,134,990 22,126,660 49,392,046
Mr. Kelly............ 28,000 734,414 250,376 543,916 11,309,826 22,043,709
</TABLE>
- ---------------
(a) Calculated using the difference between (1) the actual sales price of the
underlying shares (if the underlying shares were sold immediately upon
exercise) or the closing sales price of the common stock on the date of
exercise (if the underlying shares were not sold immediately upon exercise)
and (2) the exercise price.
(b) Amounts were calculated by multiplying the number of unexercised options by
the closing sales price of the common stock on the last trading day of
fiscal 1998 ($49.72) and subtracting the exercise price.
Under the ESOIP, which is a program implemented under the Incentive Plan,
certain members of the Company's management (including the executive officers)
may elect, on an annual basis, to receive stock options in lieu of all or a
portion of the annual bonus that they would otherwise receive. The exercise
price of the options is 80% of the fair market value of the Company's common
stock on the date of issuance. The number of shares subject to the options is
dependent on the amount of bonus a participant designates for the program and is
calculated by dividing the designated bonus amount by 20% of the fair market
value of the common stock on the date of issuance. For the first two years of
the program (fiscal 1996 and fiscal 1997), the options were fully vested at the
time of issuance but were not exercisable for a period of one year. Effective
for fiscal 1998, the options are subject to a one-year vesting period and do not
vest and become exercisable until the first anniversary of the date of grant.
All decisions regarding participation in the program and the amount of bonus to
designate must be made several months in advance of the anticipated bonus
payment date. With respect to fiscal 1998, 240 persons (including four of the
Named Executive Officers) elected to participate in the program with respect to
their bonuses for such year.
401(k) Retirement Plan -- The Company maintains a defined contribution
retirement plan that complies with the provisions of Section 401(k) of the
Internal Revenue Code. Substantially all U.S. employees are eligible to
participate in the plan, and eligibility for participation commences upon
hiring. Under the terms of the plan, the Company currently matches 100% of each
employee participant's voluntary contributions, subject to a maximum Company
contribution of 3% of the employee's compensation. The Company's matching
contributions are used to purchase the Company's common stock and vest at the
rate of 20% on each of the first five anniversaries of the date of hire. After
the completion of five years of service with the Company, a participant may
elect to transfer the portion of his or her funds held in the form of common
stock to another available investment fund. During fiscal 1998, the Company made
a discretionary contribution for every eligible employee, regardless of whether
the employee was a plan participant, equal to 2% of the employee's actual
earnings during calendar 1997.
Deferred Compensation Plan -- The Company maintains a deferred compensation
plan, pursuant to which certain members of management (including the executive
officers) may elect to defer a portion of annual compensation. The Company
matches 100% of the employee's voluntary contributions not in excess of 3% of
annual compensation. The funds attributable to a participant (including
51
<PAGE> 53
voluntary contributions and matching contributions) are invested among various
funds designated by the plan administrator. Upon the death or retirement of a
participant, the funds attributable to the participant (including any earnings
on contributions) are distributed to the participant or the participant's
beneficiary in a lump sum or in annual, quarterly or monthly installments over a
period of up to ten years. A participant whose employment with the Company is
terminated prior to death or retirement is entitled to receive his or her
contributions to the plan (and any earnings thereon) but is entitled to receive
the Company's matching contributions only if he or she has completed four years
of service with the Company.
Employee Stock Purchase Plan -- The Company maintains an employee stock purchase
plan that qualifies under Section 423 of the Internal Revenue Code and permits
substantially all employees to purchase shares of the Company's common stock.
Participating employees may purchase common stock at the end of each
participation period at a purchase price equal to 85% of the lower of the fair
market value of the common stock at the beginning or the end of the
participation period. Participation periods are semi-annual and begin on January
1 and July 1 of each year. Employees may designate up to 15% of their base
compensation for the purchase of common stock under the plan.
Employment Agreements and Change-in-Control Arrangements -- Each of the Named
Executive Officers has entered into an employment agreement with the Company.
For the Named Executive Officers other than Mr. Dell, such employment agreements
do not contain any provisions regarding compensation or continued employment and
are identical in all material respects to those contained in the employment
agreement entered into by all the Company's employees upon the commencement of
their employment with the Company. Mr. Dell's employment agreement provides for
continued employment for successive one-year terms, subject to termination at
any time at the option of Mr. Dell upon 30 days' written notice.
Under the terms of the Incentive Plan and the Company's prior stock option
plans, the Compensation Committee, if it so chooses, may issue awards with
provisions that accelerate vesting and exercisability in the event of a
change-in-control of the Company and may amend existing awards to provide for
such acceleration. To date, the Compensation Committee has not elected to
include such acceleration provisions in any awards.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Miles, Mr. Hirschbiel and Mr. Jordan served as members of the Compensation
Committee of the Company's Board of Directors during all of fiscal 1998, and Mr.
Mandl has been serving as a member of the Compensation Committee since his
election to the Board of Directors in November 1997. None of such persons is an
officer or employee, or former officer or employee, of the Company or any of its
subsidiaries. No interlocking relationship exists between the members of the
Company's Board of Directors or Compensation Committee and the board of
directors or compensation committee of any other company, nor has any such
interlocking relationship existed in the past.
52
<PAGE> 54
ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides information about the beneficial ownership of the
Company's common stock (the only class of voting securities of the Company
outstanding) by the persons known to the Company to be the beneficial owners of
more than 5% of the outstanding common stock, by each of the Company's
directors, by each Named Executive Officer and by all of the Company's directors
and executive officers as a group. To the best of the Company's knowledge, each
such person holds sole investment and voting power over the shares shown, except
as otherwise indicated.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENTAGE
OF BENEFICIAL OF
BENEFICIAL OWNER OWNERSHIP(A) CLASS (B)
---------------- ----------------- ----------
<S> <C> <C>
Michael S. Dell............................................. 103,047,382(c)(d) 16.1%
One Dell Way
Round Rock, Texas 78682-2244
Alliance Capital Management L.P............................. 35,925,662(e) 5.5%
787 Seventh Avenue
New York, New York 10019
Donald J. Carty............................................. 235,200(c) *
Paul O. Hirschbiel, Jr...................................... 203,424(c)(f) *
Michael H. Jordan........................................... 435,200(c) *
Thomas W. Luce III.......................................... 1,120(c) *
Klaus S. Luft............................................... 201,600(c) *
Claudine B. Malone.......................................... 108,000(c) *
Alex J. Mandl............................................... 0 *
Michael A. Miles............................................ 399,958(c)(g) *
Morton L. Topfer............................................ 964,914(c)(h) *
Kevin B. Rollins............................................ 538,322(c) *
Thomas J. Meredith.......................................... 1,402,983(c)(i) *
Phillip E. Kelly............................................ 225,926(c) *
Directors and executive officers as a group (24 persons).... 110,123,270(c) 17.1%
</TABLE>
- ---------------
* Less than 1%.
(a) As of March 31, 1998, unless otherwise indicated.
(b) Based on the number of shares outstanding (640,316,904) at the close of
business on March 31, 1998, unless otherwise indicated.
(c) Includes the following number of shares subject to options that were
exercisable at or within 60 days after March 31, 1998: Mr. Dell, 1,232,000;
Mr. Carty, 235,200; Mr. Hirschbiel, 110,400; Mr. Jordan, 355,200; Mr. Luce,
1,120; Mr. Luft, 201,600; Ms. Malone, 48,000; Mr. Miles, 202,720; Mr.
Topfer, 309,388; Mr. Rollins, 536,000; Mr. Meredith, 556,187; Mr. Kelly, 0;
and all directors and executive officers as a group, 4,503,358. Also
includes the following number of shares held for the person's account in the
Company-sponsored 401(k) retirement savings plan: Mr. Dell, 24,830; Mr.
Topfer, 4,190; Mr. Rollins, 458; Mr. Meredith, 9,456; Mr. Kelly, 2,958; and
all directors and executive officers as a group, 66,454.
(d) Does not include 1,620,000 shares held in a trust of which Mr. Dell is the
grantor, 1,520,000 shares held in a trust of which Mr. Dell's spouse is the
grantor or 10,112,128 shares held by Mr. Dell's spouse.
(e) Based on a Schedule 13G filed with the Securities and Exchange Commission on
February 13, 1998 and reflecting ownership of common stock, and the
percentage of shares outstanding, as of December 31, 1997. The following
information is taken from that filing. The Schedule 13G was filed by The
Equitable Companies Incorporated ("Equitable"); AXA-UAP, which beneficially
owns a majority interest in Equitable; and Alpha Assurances Vie Mutuelle,
AXA Assurances I.A.R.D. Mutuelle, AXA Assurances Vie Mutuelle and AXA
Courtage Assurance Mutuelle, as a group (collectively, the "Mutuelles AXA"),
which beneficially own a majority interest in AXA-UAP. The reporting persons
reported (1) deemed sole voting power over 18,866,442 shares, (2) deemed
shared voting power over 5,684,760 shares, (3) deemed sole investment power
over 35,908,752 shares and (4) deemed shared investment power over 16,910
shares. Alliance Capital Management L.P., a subsidiary of Equitable was
reported as the deemed holder of sole voting power over 18,712,642 of such
shares, shared voting power over 5,684,760 of such shares, sole investment
power over 35,908,752 of such shares and shared investment power over 7,260
of such shares.
(f) Includes 5,760 shares held in family trusts of which Mr. Hirschbiel is the
trustee.
53
<PAGE> 55
(g) Includes 40,000 shares held by Mr. Miles' spouse and 1,238 shares held
through the Company's deferred compensation plan for non-employee directors.
(h) Includes 32,368 shares held by a family limited partnership of which Mr.
Topfer is the general partner.
(i)Includes 636,220 shares held by a grantor trust of which Mr. Meredith is the
trustee and Mr. Meredith and members of his family are the beneficiaries.
ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Thomas W. Luce III, a director of the Company, is affiliated with the law firm
of Hughes & Luce, L.L.P., Dallas, Texas, which provided certain legal services
to the Company during fiscal 1998. The dollar amount of fees that the Company
paid to that firm during fiscal 1998 did not exceed 5% of that firm's gross
revenues for its last full fiscal year.
PART IV
ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS
The following financial statements are filed as a part of this Report under
"Item 8 -- Financial Statements and Supplementary Data" above:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... 20
Consolidated Statement of Financial Position at February 1,
1998 and February 2, 1997................................. 21
Consolidated Statement of Income for the three fiscal years
ended February 1, 1998.................................... 22
Consolidated Statement of Cash Flows for the three fiscal
years ended February 1, 1998.............................. 23
Consolidated Statement of Stockholders' Equity for the three
fiscal years ended February 1, 1998....................... 24
Notes to Consolidated Financial Statements.................. 25
</TABLE>
FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule is filed as a part of this Report
under "Schedule II" immediately preceding the signature page: Schedule
II -- Valuation and Qualifying Accounts for the three fiscal years ended
February 1, 1998. All other schedules called for by Form 10-K are omitted
because they are inapplicable or the required information is shown in the
financial statements, or notes thereto, included herein.
54
<PAGE> 56
EXHIBITS
The following exhibits are filed as a part of this Report, with each exhibit
that consists of or includes a management contract or compensatory plan or
arrangement being identified with an "*":
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
3.1 -- Certificate of Incorporation, dated October 21, 1987 and
filed October 22, 1987 (incorporated by reference to
Exhibit 3.1 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended July 30, 1995,
Commission File No. 0-17017)
3.2 -- Certificate of Amendment to the Certificate of
Incorporation, dated May 6, 1988 and filed May 9, 1988
(incorporated by reference to Exhibit 3.2 to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended July 30, 1995, Commission File No. 0-17017)
3.3 -- Certificate of Amendment to the Certificate of
Incorporation, dated June 19, 1991 and filed June 21,
1991 (incorporated by reference to Exhibit 3.3 to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended July 30, 1995, Commission File No. 0-17017)
3.4 -- Certificate of Amendment to the Certificate of
Incorporation, dated June 19, 1992 and filed July 10,
1992 (incorporated by reference to Exhibit 3.4 to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended July 30, 1995, Commission File No. 0-17017)
3.5 -- Certificate of Designation of Series A Convertible
Preferred Stock, dated August 24, 1993 and filed August
25, 1993 (incorporated by reference to Exhibit 3.5 to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended July 30, 1995, Commission File No. 0-17017)
3.6 -- Certificate of Correction Filed to Correct Certain Errors
in the Certificate of Amendment of Certificate of
Incorporation Filed in the Office of the Secretary of
State of Delaware on May 9, 1988, and in the Certificate
of Amendment of Certificate of Incorporation Filed in the
Office of the Secretary of State of Delaware on July 10,
1992, dated April 27, 1994 and filed May 5, 1994
(incorporated by reference to Exhibit 3.6 to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended July 30, 1995, Commission File No. 0-17017)
3.7 -- Certificate of Amendment to Certificate of Incorporation,
dated July 31, 1995 and filed August 3, 1995
(incorporated by reference to Exhibit 3.7 to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended July 30, 1995, Commission File No. 0-17017)
3.8 -- Certificate of Designations of Series A Junior
Participating Preferred Stock, dated November 29, 1995
and filed December 4, 1995 (incorporated by reference to
Exhibit 3.1 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended October 29, 1995,
Commission File No. 0-17017)
3.9 -- Certificate of Amendment to Certificate of Incorporation,
dated and filed July 18, 1997 (incorporated by reference
to Exhibit 3 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended August 3, 1997,
Commission File No. 0-17017)
3.10 -- Restated Bylaws, as adopted on November 29, 1995
(incorporated by reference to Exhibit 3.3 to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended October 29, 1995, Commission File No.
0-17017)
</TABLE>
55
<PAGE> 57
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
4.1 -- Rights Agreement, dated as of November 29, 1995
(incorporated by reference to Exhibit 4 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter
ended October 29, 1995, Commission File No. 0-17017)
4.2 -- Indenture, dated as of August 15, 1993, between the
Company and The First National Bank of Boston regarding
the Company's 11% Senior Notes Due August 15, 2000
(incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-4,
Registration No. 33-69680)
4.3 -- First Supplemental Indenture, dated as of August 16,
1996, between the Company and State Street Bank and Trust
Company, as successor trustee to The First National Bank
of Boston, regarding the Company's 11% Senior Notes Due
August 16, 2000 (incorporated by reference to Exhibit 4
to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended July 28, 1996, Commission File No.
0-17017)
10.1* -- Dell Computer Corporation 1986 Incentive Stock Option
Plan, as amended (incorporated by reference to Exhibit 4c
to the Company's Registration Statement on Form S-8,
Registration No. 33-24621)
10.2* -- Dell Computer Corporation 1987 Incentive Stock Option
Plan, as amended (incorporated by reference to Exhibit 4d
to the Company's Registration Statement on Form S-8,
Registration No. 33-24621)
10.3* -- Dell Computer Corporation 1987 Non-qualified Stock Option
Plan, as amended, including the UK Scheme (incorporated
by reference to Exhibit 4e to the Company's Registration
Statement on Form S-8, Registration No. 33-24621)
10.4* -- Dell Computer Corporation 1989 Stock Option Plan, as
amended and restated (incorporated by reference to
Exhibit 10.4 to the Company's Annual Report on Form 10-K
for the fiscal year ended January 31, 1993, Commission
File No. 0-17017)
10.5* -- Dell Computer Corporation 1993 Stock Option Plan
(incorporated by reference to Exhibit 10.36 to the
Company's Registration Statement on Form S-4,
Registration No. 33-69680)
10.6* -- Dell Computer Corporation Incentive Plan (incorporated by
reference to Exhibit 4.6 to the Company's Registration
Statement on Form S-8, Registration No. 33-54577)
10.7* -- First Amendment to Dell Computer Corporation Incentive
Plan, dated as of July 21, 1995 (incorporated by
reference to Exhibit 10.3 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended July 30,
1995, Commission File No. 0-17071)
10.8* -- Second Amendment to Dell Computer Corporation Incentive
Plan, dated as of November 29, 1995 (incorporated by
reference to Exhibit 10.8 to the Company's Annual Report
on Form 10-K for the fiscal year ended January 28, 1996,
Commission File No. 0-17017)
10.9* -- Third Amendment to Dell Computer Corporation Incentive
Plan, dated as of July 18, 1997 (incorporated by
reference to Exhibit 10 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended August 3, 1997,
Commission File No. 0-17017)
</TABLE>
56
<PAGE> 58
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.10* -- Fourth Amendment to Dell Computer Corporation Incentive
Plan, dated as of September 12, 1997 (incorporated by
reference to Exhibit 10 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended November 2,
1997, Commission File No. 0-17017)
10.11*+ -- Fifth Amendment to Dell Computer Corporation Incentive
Plan, dated as of November 21, 1997
10.12* -- Dell Computer Corporation Deferred Compensation Plan
(incorporated by reference to Exhibit 10.8 to the
Company's Annual Report on Form 10-K for the fiscal year
ended February 3, 1991, Commission File No. 0-17017)
10.13* -- Amendment to Deferred Compensation Plan, adopted on
August 25, 1995 (incorporated by reference to Exhibit
10.10 to the Company's Annual Report on Form 10-K for the
fiscal year ended January 28, 1996, Commission File No.
0-17017)
10.14* -- Executive Incentive Bonus Plan, adopted March 1, 1995
(incorporated by reference to Exhibit 10.10 to the
Company's Annual Report on Form 10-K for the fiscal year
ended January 28, 1996, Commission File No. 0-17017)
10.15* -- Form of Indemnity Agreement between the Company and
certain of its officers, directors and key employees
(incorporated by reference to Exhibit 10.23 to the
Company's Registration Statement on Form S-1,
Registration No. 33-21823)
10.16* -- Agreement, dated May 12, 1988, between the Company and
Michael S. Dell, along with the Employment Agreement,
dated May 3, 1984, between Michael S. Dell and the
Company's predecessor (incorporated by reference to
Exhibit 10.25 to the Company's Registration Statement on
Form S-1, Registration No. 33-38991)
10.17* -- Employment Agreement, dated November 16, 1992, between
the Company and Thomas J. Meredith (incorporated by
reference to Exhibit 10.36 to the Company's Annual Report
on Form 10-K for the fiscal year ended January 31, 1993,
Commission File No. 0-17017)
12+ -- Computation of Ratio of Earnings to Fixed Charges
21+ -- Subsidiaries of the Company
23+ -- Consent of Price Waterhouse LLP
27+ -- Financial Data Schedule
</TABLE>
- ---------------
* Identifies Exhibit that consists of or includes a management contract or
compensatory plan or arrangement.
+ Filed herewith.
REPORTS ON FORM 8-K
The Company did not file any Current Reports on Form 8-K during the fourth
quarter of the fiscal year ended February 1, 1998.
57
<PAGE> 59
SCHEDULE II
DELL COMPUTER CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO WRITE-OFFS BALANCE AT
FISCAL BEGINNING BAD DEBT CHARGED TO END OF
YEAR DESCRIPTION OF PERIOD EXPENSE ALLOWANCE PERIOD
- ------ ----------- ---------- ---------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
1998.................. Allowance for doubtful accounts $31 $10 $13 $28
1997.................. Allowance for doubtful accounts $29 $12 $10 $31
1996.................. Allowance for doubtful accounts $26 $13 $10 $29
</TABLE>
58
<PAGE> 60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C>
DELL COMPUTER CORPORATION
Date: April 14, 1998 By: /s/ MICHAEL S. DELL
--------------------------------------------
Michael S. Dell,
Chairman of the Board and
Chief Executive Officer
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ MICHAEL S. DELL Chairman of the Board and Chief April 14, 1998
- ----------------------------------------------------- Executive Officer (principal
Michael S. Dell executive officer)
/s/ DONALD J. CARTY Director April 14, 1998
- -----------------------------------------------------
Donald J. Carty
/s/ PAUL O. HIRSCHBIEL, JR. Director April 14, 1998
- -----------------------------------------------------
Paul O. Hirschbiel, Jr.
/s/ MICHAEL H. JORDAN Director April 14, 1998
- -----------------------------------------------------
Michael H. Jordan
/s/ THOMAS W. LUCE, III Director April 14, 1998
- -----------------------------------------------------
Thomas W. Luce, III
/s/ KLAUS S. LUFT Director April 14, 1998
- -----------------------------------------------------
Klaus S. Luft
/s/ CLAUDINE B. MALONE Director April 14, 1998
- -----------------------------------------------------
Claudine B. Malone
/s/ ALEX J. MANDL Director April 14, 1998
- -----------------------------------------------------
Alex J. Mandl
/s/ MICHAEL A. MILES Director April 14, 1998
- -----------------------------------------------------
Michael A. Miles
/s/ THOMAS J. MEREDITH Senior Vice President and Chief April 14, 1998
- ----------------------------------------------------- Financial Officer (principal
Thomas J. Meredith financial officer)
/s/ JAMES M. SCHNEIDER Vice President - Finance April 14, 1998
- ----------------------------------------------------- (principal accounting
James M. Schneider officer)
</TABLE>
59
<PAGE> 61
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
3.1 -- Certificate of Incorporation, dated October 21, 1987 and
filed October 22, 1987 (incorporated by reference to
Exhibit 3.1 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended July 30, 1995,
Commission File No. 0-17017)
3.2 -- Certificate of Amendment to the Certificate of
Incorporation, dated May 6, 1988 and filed May 9, 1988
(incorporated by reference to Exhibit 3.2 to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended July 30, 1995, Commission File No. 0-17017)
3.3 -- Certificate of Amendment to the Certificate of
Incorporation, dated June 19, 1991 and filed June 21,
1991 (incorporated by reference to Exhibit 3.3 to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended July 30, 1995, Commission File No. 0-17017)
3.4 -- Certificate of Amendment to the Certificate of
Incorporation, dated June 19, 1992 and filed July 10,
1992 (incorporated by reference to Exhibit 3.4 to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended July 30, 1995, Commission File No. 0-17017)
3.5 -- Certificate of Designation of Series A Convertible
Preferred Stock, dated August 24, 1993 and filed August
25, 1993 (incorporated by reference to Exhibit 3.5 to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended July 30, 1995, Commission File No. 0-17017)
3.6 -- Certificate of Correction Filed to Correct Certain Errors
in the Certificate of Amendment of Certificate of
Incorporation Filed in the Office of the Secretary of
State of Delaware on May 9, 1988, and in the Certificate
of Amendment of Certificate of Incorporation Filed in the
Office of the Secretary of State of Delaware on July 10,
1992, dated April 27, 1994 and filed May 5, 1994
(incorporated by reference to Exhibit 3.6 to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended July 30, 1995, Commission File No. 0-17017)
3.7 -- Certificate of Amendment to Certificate of Incorporation,
dated July 31, 1995 and filed August 3, 1995
(incorporated by reference to Exhibit 3.7 to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended July 30, 1995, Commission File No. 0-17017)
3.8 -- Certificate of Designations of Series A Junior
Participating Preferred Stock, dated November 29, 1995
and filed December 4, 1995 (incorporated by reference to
Exhibit 3.1 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended October 29, 1995,
Commission File No. 0-17017)
3.9 -- Certificate of Amendment to Certificate of Incorporation,
dated and filed July 18, 1997 (incorporated by reference
to Exhibit 3 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended August 3, 1997,
Commission File No. 0-17017)
3.10 -- Restated Bylaws, as adopted on November 29, 1995
(incorporated by reference to Exhibit 3.3 to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended October 29, 1995, Commission File No.
0-17017)
4.1 -- Rights Agreement, dated as of November 29, 1995
(incorporated by reference to Exhibit 4 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter
ended October 29, 1995, Commission File No. 0-17017)
</TABLE>
<PAGE> 62
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
4.2 -- Indenture, dated as of August 15, 1993, between the
Company and The First National Bank of Boston regarding
the Company's 11% Senior Notes Due August 15, 2000
(incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-4,
Registration No. 33-69680)
4.3 -- First Supplemental Indenture, dated as of August 16,
1996, between the Company and State Street Bank and Trust
Company, as successor trustee to The First National Bank
of Boston, regarding the Company's 11% Senior Notes Due
August 16, 2000 (incorporated by reference to Exhibit 4
to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended July 28, 1996, Commission File No.
0-17017)
10.1* -- Dell Computer Corporation 1986 Incentive Stock Option
Plan, as amended (incorporated by reference to Exhibit 4c
to the Company's Registration Statement on Form S-8,
Registration No. 33-24621)
10.2* -- Dell Computer Corporation 1987 Incentive Stock Option
Plan, as amended (incorporated by reference to Exhibit 4d
to the Company's Registration Statement on Form S-8,
Registration No. 33-24621)
10.3* -- Dell Computer Corporation 1987 Non-qualified Stock Option
Plan, as amended, including the UK Scheme (incorporated
by reference to Exhibit 4e to the Company's Registration
Statement on Form S-8, Registration No. 33-24621)
10.4* -- Dell Computer Corporation 1989 Stock Option Plan, as
amended and restated (incorporated by reference to
Exhibit 10.4 to the Company's Annual Report on Form 10-K
for the fiscal year ended January 31, 1993, Commission
File No. 0-17017)
10.5* -- Dell Computer Corporation 1993 Stock Option Plan
(incorporated by reference to Exhibit 10.36 to the
Company's Registration Statement on Form S-4,
Registration No. 33-69680)
10.6* -- Dell Computer Corporation Incentive Plan (incorporated by
reference to Exhibit 4.6 to the Company's Registration
Statement on Form S-8, Registration No. 33-54577)
10.7* -- First Amendment to Dell Computer Corporation Incentive
Plan, dated as of July 21, 1995 (incorporated by
reference to Exhibit 10.3 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended July 30,
1995, Commission File No. 0-17071)
10.8* -- Second Amendment to Dell Computer Corporation Incentive
Plan, dated as of November 29, 1995 (incorporated by
reference to Exhibit 10.8 to the Company's Annual Report
on Form 10-K for the fiscal year ended January 28, 1996,
Commission File No. 0-17017)
10.9* -- Third Amendment to Dell Computer Corporation Incentive
Plan, dated as of July 18, 1997 (incorporated by
reference to Exhibit 10 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended August 3, 1997,
Commission File No. 0-17017)
10.10* -- Fourth Amendment to Dell Computer Corporation Incentive
Plan, dated as of September 12, 1997 (incorporated by
reference to Exhibit 10 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended November 2,
1997, Commission File No. 0-17017)
10.11*+ -- Fifth Amendment to Dell Computer Corporation Incentive
Plan, dated as of November 21, 1997
</TABLE>
<PAGE> 63
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.12* -- Dell Computer Corporation Deferred Compensation Plan
(incorporated by reference to Exhibit 10.8 to the
Company's Annual Report on Form 10-K for the fiscal year
ended February 3, 1991, Commission File No. 0-17017)
10.13* -- Amendment to Deferred Compensation Plan, adopted on
August 25, 1995 (incorporated by reference to Exhibit
10.10 to the Company's Annual Report on Form 10-K for the
fiscal year ended January 28, 1996, Commission File No.
0-17017)
10.14* -- Executive Incentive Bonus Plan, adopted March 1, 1995
(incorporated by reference to Exhibit 10.10 to the
Company's Annual Report on Form 10-K for the fiscal year
ended January 28, 1996, Commission File No. 0-17017)
10.15* -- Form of Indemnity Agreement between the Company and
certain of its officers, directors and key employees
(incorporated by reference to Exhibit 10.23 to the
Company's Registration Statement on Form S-1,
Registration No. 33-21823)
10.16* -- Agreement, dated May 12, 1988, between the Company and
Michael S. Dell, along with the Employment Agreement,
dated May 3, 1984, between Michael S. Dell and the
Company's predecessor (incorporated by reference to
Exhibit 10.25 to the Company's Registration Statement on
Form S-1, Registration No. 33-38991)
10.17* -- Employment Agreement, dated November 16, 1992, between
the Company and Thomas J. Meredith (incorporated by
reference to Exhibit 10.36 to the Company's Annual Report
on Form 10-K for the fiscal year ended January 31, 1993,
Commission File No. 0-17017)
12+ -- Computation of Ratio of Earnings to Fixed Charges
21+ -- Subsidiaries of the Company
23+ -- Consent of Price Waterhouse LLP
27+ -- Financial Data Schedule
</TABLE>
- ---------------
* Identifies Exhibit that consists of or includes a management contract or
compensatory plan or arrangement.
+ Filed herewith.
<PAGE> 1
EXHIBIT 10.11
FIFTH AMENDMENT
TO
DELL COMPUTER CORPORATION INCENTIVE PLAN
Dell Computer Corporation, a Delaware corporation (the "Company"),
hereby adopts an amendment to the Dell Computer Corporation Incentive Plan,
dated June 22, 1994, as amended (the "Incentive Plan"), as specified below.
RECITALS
A. The Incentive Plan was submitted to, and approved by, the
stockholders of the Company at the Company's annual meeting of stockholders held
on June 22, 1994. Following such approval, the Incentive Plan was adopted by the
Company effective June 22, 1994. The Incentive Plan was subsequently amended
effective July 21, 1995, November 30, 1995, July 18, 1997 and September 12,
1997.
B. The Board of Directors of the Company (the "Board") has duly adopted
resolutions directing that the Incentive Plan be amended as described herein and
approving the amendment to the Incentive Plan described herein.
Now, therefore, the Company hereby adopts the following amendment to
the Incentive Plan.
1. AMENDMENT TO OPTION AWARDS FOR NON-EMPLOYEE DIRECTORS.
(a) Paragraph 5.2 of the Incentive Plan is hereby deleted and
replaced in its entirety with the following:
5.2 Automatic Grant of Awards. Awards of Nonstatutory Options shall
be made automatically to Non-employee Directors as follows:
(a) For each Service Year (as defined below), commencing with
the Service Year that begins in 1998, each Non-employee Director who
is a director of the Corporation at the beginning of such Service
Year shall be granted a Nonstatutory Option, effective as of the
first day of such Service Year. The number of shares of Stock
subject to such Option shall be the number (rounded to the next
lowest whole number) obtained by dividing (1) the Annual Award Base
Number (as defined in subparagraph (c) of this Paragraph 5.2)
applicable in such Service Year by (2) the Fair Market Value of the
Stock on the Date of Grant (such number being referred to herein as
the "Annual Award"). As
<PAGE> 2
used herein, a "Service Year" is the approximately annual period
commencing at an annual meeting of the Corporation's stockholders
and ending at the next annual meeting of the Corporation's
stockholders. Each person who first becomes a Non-employee Director
after the beginning of a Service Year shall be granted a
Nonstatutory Option, effective as of the date of the first meeting
of the Board of Directors that such person attends in his or her
capacity as a Non-employee Director, with the number of shares of
Stock subject to such Option being computed as follows: if 50% or
more of the scheduled Board of Directors meetings for such Service
Year are scheduled to occur after such person first becomes a
Non-employee Director, the number of shares of Stock subject to such
Option shall be equal to 100% of the Annual Award; otherwise, the
number of shares of Stock subject to such Option shall be equal to
50% of the Annual Award.
(b) Each person who first becomes a Non-employee Director during
or after the Service Year that began in 1997 shall be granted a
Nonstatutory Option, effective as of the date of the first meeting
of the Board of Directors that such person attends in his or her
capacity as a Non-employee Director. The number of shares of Stock
subject to such Option shall be the number (rounded to the next
lowest whole number) obtained by dividing (1) the Initial Award Base
Number (as defined in subparagraph (c) of this Paragraph 5.2)
applicable on the Date of Grant by (2) the Fair Market Value of the
Stock on the Date of Grant.
(c) The "Annual Award Base Number" applicable in the Service
Year that begins in 1998 shall be $650,000, and the "Annual Award
Base Number" applicable in any subsequent Service Year shall be
equal to 110% of the Annual Award Base Number applicable in the
immediately preceding Service Year. The "Initial Award Base Number"
applicable on any day shall be equal to 300% of the Annual Award
Base Number applicable on such day.
(d) Notwithstanding any provision of this Plan to the contrary,
the method of computing the number of shares subject to the
automatic Awards under this Paragraph 5.2 shall not be adjusted by
reason of a subdivision of the number of shares of Stock then
outstanding into a greater number of shares (by reclassification,
Stock split, the issuance of a distribution on Stock payable in
Stock or otherwise) or a consolidation of the number of shares of
Stock then outstanding into a lesser number of shares (by
reclassification, reverse Stock split or otherwise); however, for
<PAGE> 3
automatic Awards that were issued previous to, and are outstanding
at the time of, any such event, the number of shares subject to the
Option and the applicable exercise price shall be adjusted as
provided in Paragraph 11.1.
(b) Paragraph 5.4 of the Incentive Plan is hereby deleted and
replaced in its entirety with the following:
5.4 Terms and Conditions of Automatic Awards. Each Option that is
automatically awarded to a Non-employee Director pursuant to Paragraph
5.2 shall be subject to the following terms (in addition to the terms
specified in Paragraph 5.2):
(a) The exercise price per share shall be the Fair Market Value
of the Stock on the Date of Grant.
(b) The Option shall vest and become exercisable with respect to
20% of the shares subject to the Option on each of the first five
anniversaries of the Date of Grant so long as the Non-employee
Director remains a director of the Corporation through those dates.
(c) The Option shall terminate at the close of business on the
tenth anniversary of the Date of Grant or, if earlier, as follows:
(1) if the Non-employee Director is removed from the Board of
Directors in accordance with the terms of the Corporation's Bylaws
or resigns from the Board of Directors (and such resignation was
demanded or requested by the Board of Directors), the Option shall
terminate immediately upon such removal or resignation; (2) if the
Non-employee Director ceases to be director of the Corporation
because of his or her death or Disability, the Option shall
terminate at the close of business on the date that is one year
after the Non-employee Director ceases to be a director of the
Corporation; and (3) if the Non-employee Director ceases to be a
director of the Corporation for any other reason, at the close of
business on the 90th day after the Non-employee Director ceases to
be a director of the Corporation. Upon termination of the Option,
any portion thereof that has not been exercised (whether or not such
portion has vested and become exercisable) shall be void.
(d) The following provisions of this Plan shall be incorporated
into the applicable Award Agreement: Paragraphs 11.10, 11.11, 11.12,
11.15, 11.16, 11.17, 11.19 and 11.21, the last sentence of Paragraph
11.23, Section 12 and Section 13.
<PAGE> 4
Otherwise, the Option shall not be subject to the provisions of
Section 10 or 11.
2. NO EFFECT ON OTHER PROVISIONS. Except as described in Paragraph 1
above, the terms, conditions and provisions of the Incentive Plan shall remain
in full force and effect and shall be unaffected by this amendment.
3. EFFECTIVE DATE OF AMENDMENT. This amendment, and the changes to the
provisions of the Incentive Plan effected hereby, shall be effective as of
November 21, 1997.
In witness whereof, the Company, acting by and through its duly
authorized officer, has executed this instrument to be effective as of the date
specified in Section 3 above.
DELL COMPUTER CORPORATION
By: MICHAEL S. DELL
------------------------------------
Michael S. Dell
Chairman and Chief Executive Officer
<PAGE> 1
EXHIBIT 12
DELL COMPUTER CORPORATION
Computation of Ratio of Earnings to Fixed Charges
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------------------------------------------------------
February 1, February 2, January 28, January 29, January 30, January 31,
1998 1997 1996 1995 1994 1993
------------ ----------- ----------- ----------- ----------- -----------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before income taxes
and extraordinary loss $1,368 $747 $383 $213 ($39) $143
Fixed Charges:
Interest expense and amortization
of debt discount and premium 3 8 17 15 14 11
Interest factor on rentals 12 11 7 7 6 5
------------ ----------- ----------- ----------- ----------- -----------
Total Fixed Charges 15 19 24 22 20 16
Income (loss) before income taxes,
extraordinary loss, and fixed charges $1,383 $766 $407 $235 ($19) $159
------------ ----------- ----------- ----------- ----------- -----------
Ratio of Earnings to Fixed Charges(a) 93.1 41.0 16.7 10.9 (b) 10.1
============ =========== =========== =========== =========== ===========
</TABLE>
(a) Ratios calculated based on underlying data in thousands
(b) Earnings were inadequate to cover combined fixed charges by $19 million
<PAGE> 1
EXHIBIT 21
DELL COMPUTER CORPORATION
Listing of Subsidiaries
<TABLE>
<CAPTION>
NAME JURISDICTION
<S> <C>
Dell Asia Pacific Sdn Liaison Office India/Malaysia
Dell Asia Pacific Sdn. Malaysia
Dell Catalog Sales Corporation Delaware
Dell Catalog Sales L.P. Texas
dba Dell Computer Home Systems
Dell Computadores do Brasil LTDA. Brazil
Dell Computer (Pty.) Ltd. South Africa
Dell Computer AB Finland
Dell Computer AB Sweden
Dell Computer AS Denmark
Dell Computer AS Norway
Dell Computer Asia LTD. Hong Kong
Dell Computer Asia Pte. Ltd. Singapore
Dell Computer BV Netherlands
Dell Computer Co., Ltd. Thailand
Dell Computer Corporation Korea
Dell Computer Corporation Ontario, Canada
Dell Computer Corporation K.K. Japan
Dell Computer Corporation Limited United Kingdom
Dell Computer de Mexico, S.A. de C.V. Mexico
Dell Computer EEIG United Kingdom
Dell Computer Ges.m.b.H Austria
Dell Computer GmbH Germany
Dell Computer Holdings (Europe) B.V. Netherlands
Dell Computer Holdings Corporation Delaware
Dell Computer Holdings L.P. Texas
Dell Computer International Transactions Madeira
LDA
Dell Computer Limited Ireland
Dell Computer Limited New Zealand
Dell Computer NV Belgium
Dell Computer NV Madeira
Dell Computer OY Finland
Dell Computer PTY. Limited Australia
Dell Computer S.A. France
Dell Computer S.A. Spain
Dell Computer SA Switzerland
Dell Computer sro Czech Republic
Dell Computer Sp.z,o.o. Poland
Dell Direct Ireland
Dell Direct Sales Corporation Delaware
Dell Direct Sales L.P. Texas
Dell Distribution (EMEA) Limited United Kingdom
Dell Eastern Europe Corporation Delaware
Dell Export Sales Corporation Barbados
</TABLE>
<PAGE> 2
<TABLE>
<S> <C>
Dell Funding Corporation Delaware
Dell Gen. P. Corp. Delaware
Dell International Incorporated Delaware
Dell Products (Asia) BV Taiwan Branch Taiwan
Dell Marketing Corporation Delaware
Dell Marketing L.P. Texas
dba Dell Computer Marketing L.P.
Dell Products Ireland
Dell Products (Asia) B.V. Netherlands
Dell Products (Europe) B.V. Netherlands
Dell Products (Europe) B.V. Beijing Beijing/Netherlands
Representative Office
Dell Products Corporation Delaware
Dell Products L.P. Texas
Dell Quebec Inc. Quebec
Dell Receivables Gen P. Corp. Delaware
Dell Receivables L.P. Texas
Dell Research Ireland
Dell USA Corporation Delaware
Dell USA L.P. Texas
Dell World Trade L.P. Texas
DCC Executive Security Inc. Delaware
Dell Computer (FZE) (U.A.E.) Dubai
Dell Computer de Chile LTDA Chile
Dell Computer Holdings (Europe) Netherlands
Investments, C.V.
Dell Computer International (II) - Madeira
Comerico de Computadores Sociedad
Unipissal LDA
Dell Computer (China) Co. Ltd. Xiamen
Dell Computer de Chile Corp. Delaware
Dell Computer de Colombia Corp. Delaware
Dell Computer (Italia) S.p.A. Italy
Dell Computer Services de Mexico de C.V. Mexico
Dell DFS Corporation Delaware
Dell Financial Services L.P. Texas - nonconsolidated subsidiary
Dell Credit Company L.L.C. Delaware - nonconsolidated subsidiary
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (No. 333-47861) and Form S-8 (Nos. 33-24621, 33-54577,
33-31812 and 33-63273) of Dell Computer Corporation of our report dated
February 16, 1998 appearing on page 20 of this Form 10-K.
PRICE WATERHOUSE LLP
Austin, Texas
April 14, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DELL
COMPUTER CORPORATION FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED FEBRUARY
1, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-01-1998
<PERIOD-END> FEB-01-1998
<CASH> 320
<SECURITIES> 1,524
<RECEIVABLES> 1,514
<ALLOWANCES> 28
<INVENTORY> 233
<CURRENT-ASSETS> 3,912
<PP&E> 509
<DEPRECIATION> 167
<TOTAL-ASSETS> 4,268
<CURRENT-LIABILITIES> 2,697
<BONDS> 17
0
0
<COMMON> 747
<OTHER-SE> 546
<TOTAL-LIABILITY-AND-EQUITY> 4,268
<SALES> 12,327
<TOTAL-REVENUES> 12,327
<CGS> 9,605
<TOTAL-COSTS> 9,605
<OTHER-EXPENSES> 204
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3
<INCOME-PRETAX> 1,368
<INCOME-TAX> 424
<INCOME-CONTINUING> 944
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 944
<EPS-PRIMARY> 1.44
<EPS-DILUTED> 1.28
</TABLE>
